COVID-19 case numbers have continued to rise with signs that further restrictive measures may be required to contain the disease. In the US, a new round of fiscal support is still outstanding – it is required not only for the Federal Reserve’s new framework for US monetary policy to succeed, but also to address indications of a slowing recovery. Stock market valuations have moved between bouts of consolidation and hopes of more stimulus.
Over the last week, the global caseload rose above 33.9 million. Fatalities now exceed 1 million. The number of new cases in western Europe is rising persistently. In the US, after a brief respite, the COVID-19 situation appears to be worsening again.
Spain and France lead the rise in case numbers in Europe. Both countries exceed the US on a cases-per-capita-basis. So far, the number of new cases appears to have decoupled from the number of deaths due to several factors. These include:
The first two factors should persist; the third may not last since as the young transmit the disease to the old. This is currently the authorities’ principal concern.
Indeed, recent data on hospitalisations and ICU admissions from the UK, France and Spain suggests that the virus is now spreading to all age groups, with older age groups again dominating the hospitalisations and ICU admissions. Mortality rates have remained relatively low, but, as numerous studies have shown, older age, fragility and underlying co-morbidities are associated with poor outcomes in COVID patients.
While better treatment, enhanced testing and a vaccine can be expected to bring about gradual normalisation of economic activity over the coming year, they are unlikely to eradicate the virus or put an end to the need for social distancing and restrictions on mobility throughout 2021.
The ramping-up of targeted measures to control the spread of COVID-19 is now being reflected in mobility indicators such as slowing air traffic across Europe. Fears of the impact that more drastic restrictions could have on the services economy were apparent in the weaker services purchasing managers index (PMI) data in September across the major European economies.
Disappointing data in Germany also suggests that the pace of recovery in the services sector will be slower than expected. In the absence of an improvement in the epidemiological situation in the eurozone any time soon, we see greater economic risk during the final quarter of the year.
Indicators of US economic activity continue to flash recovery at a decent pace with the most interest rate-sensitive parts of the economy – housing and car sales – outperforming. US imports, which are now back to pre-COVID levels, are yet another indication that aggressive fiscal stimulus has kept US consumer spending afloat.
Looking ahead, though, as the effects of fiscal support on the US consumers fade away, consumer spending should weaken – with a lag.
Volatility returned to stock markets in September. After a strong run of positive returns, developed market indices have fallen this month. At midday on 30 September, the US S&P 500 index was, in US dollar terms, down 4.71% for the month of September (but up 3.24% year-to-date).
This is the first month of negative performance after five consecutive months of advances for the S&P 500. In Europe, the EuroSTOXX 50 was down 2.32% at midday on 30 September and down 14.64% for the year to date.
Stock markets were driven higher by abundant injections of central bank liquidity earlier in the year. It now appears that this liquidity is now proving less effective in dispelling market concerns over a weakening economic recovery. Signs that additional fiscal support may not be immediately forthcoming are also a factor weighing on sentiment in financial markets.
The fact that senior members of the US Federal Reserve have clearly signalled that, in the absence of fiscal stimulus, there are limits as to what their policy measures can achieve further clouds the outlook.
The question now is whether this sell-off is a correction in an ongoing bull market for stocks or the start of a realignment of valuations with the economic fundamentals.
We do not expect an improvement in economic and corporate fundamentals in either Europe or the US. The pace of the recovery is clearly slowing.
The key questions now are whether the Fed and European Central Bank can reassert their policy dominance and to what extent added political and economic uncertainty will weigh further on sentiment among investors. We remain cautiously optimistic given our constructive medium-term outlook for risky assets.
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.