A second wave of coronavirus, the strength of the dollar and the US presidential election are the three main issues that investors will need to follow during the closing months of 2020, according to Quilter Investors’ Ian Jensen-Humphreys.
2020 has thrown up several major challenges at investors. The year started off with rising political tensions between the US and both Iran and China, a crashing oil price and then the unprecedented impact of coronavirus.
Although most countries are still finding their way through the health crisis, economies have been able to reopen and start recovering. This mean individuals have been able to find “a semblance of normality,” according to Jensen-Humphreys.
But the manager, who runs the Quilter Investors Cirilium Blend fund range, said investors shouldn’t take their eye off the ball just because they’ve experienced some normality.
“This year has been extraordinary and one we are unlikely to see repeated for generations to come,” he said.
“However, while we have all learned to adapt and stock markets appear considerably calmer compared to the chaos witnessed in March, there are still a number of events that could have a considerable impact on portfolios.”
With that in mind, Jensen-Humphreys said there are three areas that investors need to keep a close watch of during the final months of 2020.
Second waves
Although the objective of every national lockdown was to avoid a second wave, it appears that this has been unavoidable for many countries.
This week, UK prime minister Boris Johnson implemented more stringent measures to try and control the spread of Covid-19, although did not enforce a full-scale lockdown again, after warnings that the country is heading into a second wave.
Other European countries, including Italy, Spain and Germany have seen a similar rise in Covid-19 cases following the summer tourism. The US appears to be past the worst of its summer infections.
Overall the number of cases and deaths are “mercifully lower than earlier this year,” Jensen-Humphreys said.
But it seems that the balance between reopening the economy and controlling rates of infection is yet to be achieved.
“Attention is beginning to turn towards the potential impact of children in the northern hemisphere returning to school and how this affects the infection rate in these countries,” the manager said.
“It is feared that the winter flu season may coincide with a renewed infection increase, as the virus seems to thrive in cooler temperatures and people spend less time outdoors.
“Market participants are focussed on the offsetting impacts of a fear of a true second wave, against the hope that a practical and commercially viable vaccine can be ready as early as the first half of 2021.
“If a vaccine can be delivered, that could clear a path to a full economic recovery.”
The US dollar
A second area that investors need to keep on their radars is the US dollar, arguably the most important currency in global markets.
The dollar has undergone a steady sell-off during the past few months, thanks to the growing likelihood that that US interest rates would remain low for longer and the “relatively weaker potential US growth trajectory.”
This sell-off has had a “meaningful impact on unhedged overseas equity returns”, Jensen-Humphreys said.
“As the US grapples with coronavirus outbreaks and potentially more onerous or longer lockdowns we could see the impact exacerbated,” he added
According to the Quilter Investors manager, the key beneficiary of a weaker greenback will be the euro, which has rallied “materially” against the US dollar.
Performance of the US dollar versus major currencies over 2020
Source: FE Analytics
“Ironically, this risks curtailing European growth given the strong focus on exporting for European corporates, as with costs in euros and revenues in US dollars, their profit margins may come under pressure,” he said.
“The weaker dollar is also supporting commodity prices, in particular gold and silver, which are also benefiting from low real interest rate.”
US presidential election
The final area is the US presidential election on 3 November, which pits current US president and Republican candidate Donald Trump against Democrat rival Joe Biden.
Usually elections favour the incumbent president, but that advantage appears to have been eroded for Trump by the social and economic impacts of coronavirus.
It is extremely rare that an incumbent president is re-elected during a recession year. No-one since Calvin Coolidge in 1924 has been re-elected when there was a recession within 24 months of the polling day.
Markets’ performance YTD
Source: FE Analytics
Obviously, this economic downturn is different, since it has been caused by a global public health crisis rather than poor political policies.
It’s now 40 days until the election and Jensen-Humphreys said he expects investors to start paying more attention to it as we move closer to November.
As it stands, Trump is lagging Biden by a significant margin in the polls, but sentiment towards the president has improved during the past few weeks.
Jensen-Humphreys said he expects it to be a closer race than the polls indicate at the moment.
He added that a close result in favour of either the Democrats or Republicans will be disputed by the other side because of the widespread use of the postal vote.
“Any such prolonged uncertainty would likely be the most bearish near-term outcome for markets,” he said.
One thing which Jensen-Humphreys thinks is being somewhat overlooked is the result of the US senate elections.
He said: “An underappreciated element of the vote will be the result of the Senate elections.
“Currently Republicans hold the Senate, while Democrats hold Congress – but if the Democrats can take control of the Senate, this opens up the possibility of a Democrat ‘clean sweep’ where they would control Congress, Senate and Presidency (if Joe Biden is elected).”
If a “clean sweep”, was to happen the manager explained that this would increase the likelihood that Biden can successfully push through his campaign promise of raising corporate taxes.
Biden declared that he would raise corporate tax from 21 per cent to 28 per cent. Trump previously slashed the same tax rate from 35 per cent to 21 per cent in 2017.
Trump’s tax cut was widely credited with driving the US market’s growth the past few years. But an increase would be something that is potentially very damaging to the mega-cap growth giants of the US market.
Jensen-Humphreys labelled a higher corporate tax rate as “unambiguously bad for US equities”.