October saw a resurgence of Covid-19 which saw countries scrambling to reinstate lockdowns. By the end of the month, much of Europe had returned to lockdowns, and the US was experiencing the highest daily recorded cases of the year. All of this resulted in markets falling by another 3% during the month; over the past two months, markets have now fallen by a combined 6%.
1. Kōura Growth Fund based on a typical 80:20 mix, NZ Equities 20%, US Equities 36% Emerging Markets 7.7%, Rest of World Equities 16.4%, Fixed Income 20%
Countries are reassessing the trade-off between controlling Coronavirus and damaging their economies. Winter is coming as the Northern Hemisphere braces for the second wave; global new infections are surpassing the peaks previously seen in the first wave during March and April. Large swathes of Europe are back into lockdown, while in the US a renewed lockdown appears extremely unlikely, despite escalating cases and hospitalisations.
The lockdowns imposed on large parts of the world in April / May had significant impacts on economies and global markets, though there is a hope that these second lockdowns will have smaller effects. We now better understand the virus and how to operate with large parts of the economy working remotely and it increasingly looks as though we will have a vaccine ready by the end of the year. Though, the trade-off between more jobs or less virus is the dilemma governments keep facing.
In the US, the S&P500 ended the month down by 2.9%, though this result masks a very active month with both positive and negative perspectives. The first three weeks were driven by positivity with markets pricing in a Biden win (how wrong the markets appear to have been) and US companies having a better-than-expected earnings season. All the gains were, however, wiped out in the last week as a significant spike in virus infection rates created uncertainty. This was compounded by the ominous unknown factors lurking over the election result with some even preparing for civil unrest or a Supreme Court case.
The stock market is currently hoping for a robust Democratic win (ideally winning all three chambers) that would end the fiscal stimulus gridlock. While Trump has been perfect for business with reduced regulation and lower taxes, investors are looking forward to a more normal political world. A Biden presidency is more likely to do better in curbing the Coronavirus pandemic and improving diplomatic relations around the world, particularly with China.
The speed of the COVID-19 comeback caught European countries off guard. The UK and Italy were forced to introduce restrictions. The Bloc had its third consecutive month of deflation in October (consumer prices continuing to go backwards). Currently, Eurozone unemployment sits at 8.3% with over 9% of UK workers still on Furlough schemes. Brexit came back into the headlines as negotiations were held off between the UK and EU. Although this lessens the likelihood of a no-deal outcome, the longer the process is drawn out, trade negotiations are pushed into a narrower scope and less inclusive territory.
As a result of the ongoing uncertainty, European markets continue to underperform, most of the European benchmarks were down 4-5% during the month, further extending their underperformance for the year.
China has successfully contained the pandemic on its shores, making it the central engine for global growth. The IMF has forecasted it to be the only market in the world to expect economic growth in the upcoming year. The Shanghai composite is one of the best-performing markets in the world this year being up over 5% year to date.
The Four Asian Dragons (South Korean, Taiwan, Singapore and Hong Kong) have resumed activity after effectively controlling COVID-19 and are fast being favoured by investors for their exposure to technology companies such as Alibaba, Tencent and Taiwan Semi-conductor which are all riding a wave of high demand. The emerging markets index (which contains most of these countries) rose by 1.5% in the month taking it to a year to a slight gain for the year so far.
Here in New Zealand, we can go about life relatively usually, and our economy seems to be recovering well, albeit it with no international tourism or education. The non-event, which was the New Zealand election, was largely ignored by the NZX with positive market performance, both leading up to and past our election. As is typical, the market was more impacted by international effects, with the sell-off in the US and Europe driving down the NZX and the performance of the two big market heavyweights A2 Milk and Fisher & Paykel Healthcare.
Fisher & Paykel (which makes up c.17% of the index) had a festive month as a resurgent Covid is likely to lead to the ongoing demand for its core respiratory products. A2 Milk continued to struggle and was slightly down over the month as a result of continued nervousness around the Daigou channel and nervousness that New Zealand could get caught in the middle of the worsening trade fight between Australia and China.