COUNTERPOINT OCTOBER 2020

Hitting a speed bump

The global economic recovery is heading into a more challenging period, but don’t despair

The pandemic has given us an opportunity to prove how quickly we can adapt. Working from home has its challenges, but what if you’d been training for an elite sporting event that was suddenly cancelled? We spoke to six Paralympians about how their lives changed as a result of the global health crisis. Read about their experiences here.

Members of my team, the Chief Investment Office, are located in Luxembourg, Belgium, Switzerland, Germany, the Netherlands, Spain and the UK. It has been a difficult year, but I’m proud of how we’ve worked together to adapt. The upcoming quarter presents challenges, but we see this as a speed bump – not a reason to despair. I hope you enjoy this month’s update.

The World Uncertainty Index is based on the frequency that “uncertainty” appears in the media and country risk reports. Historically, increases have typically been associated with higher market volatility and slower economic growth. Although lower than during the worst days of the Covid-19 pandemic, uncertainty is on the rise again.

We continue to believe the global economy will recover, with governments and central banks committed to supporting the healing process with stimulus measures and policies. Over time, the economy will reach escape velocity where the private sector will no longer rely on public support. Yet today significant uncertainties exist which will remain key challenges over the short term.

The rate of new infections has been rising in many regions, including parts of the US and Europe. Economic activity is likely to decelerate and could even contract in some regions as measures to slow the spread of Covid-19 are reintroduced. But governments hope to avoid full-scale lockdowns and, provided therapeutic progress continues, with ongoing support from governments, we expect that the pace of growth should pick up again early next year.

We’re also heading into a period where there’s a lot of political uncertainty. Although Joe Biden is ahead in the US presidential election polls, recent history reminds us that the unexpected is not impossible. Meanwhile, the UK is scheduled to leave the European Union on 31 December.

We believe the recovery should gain momentum in early 2021 provided therapeutics get better and lockdowns relax once again. Regardless of who wins the US elections, the Democrats and Republicans should have breathing space to agree a new rescue package. Meanwhile, although Brexit is an extra source of uncertainty for the time being, both sides will at last be able to move on with their new lives once the process is resolved.

Over time the balance of risk should improve. Ultimately, underlying structural forces on the economy, such as the transition from physical to digital, are expected to continue to change the economy and drive growth over the longer term.

As long term investors with a positive outlook over the medium and long term, we maintain our ‘risk-on’ view. However, in order to reflect the immediate risks we have adjusted our tactical allocation.

The US, in particular, faces short term risks. The election is just over a month away and Covid-19 cases continue to rise. To address this we have closed our overweight in US equities.

In order to preserve the balance of risk across our full portfolio, we have also closed our overweight allocation to the Japanese yen, a position we held as a portfolio diversifier. The yen remains undervalued, but we don’t believe there are catalysts that could push up the currency closer to its fair value any time soon.