Quarterly Markets Review – December 2020

A look back at the final quarter of 2020 when positive news on Covid-19 vaccines helped shares make gains.


  • Global equities gained in Q4 as a number of vaccine breakthroughs fostered hopes of a return to economic normality. 
  • Government bond performance was mixed, with US yields rising (meaning prices fell). Corporate bonds gained ground.
  • Commodities gained on vaccine news and a weaker US dollar.

Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

US

US equities gained over the quarter, with November especially strong due to the vaccine news. The developments eclipsed Joe Biden’s win in the US presidential election, as well as a $900 billion stimulus package announced in late December. The Federal Reserve nonetheless reinforced its supportive message, stating it will continue with current levels of quantitative easing. Economically sensitive sectors made the strongest gains, with more defensive sectors making more modest progress.

Eurozone

European equities gained sharply in Q4, again on the news of effective vaccines. Sectors that had previously suffered most severely from the pandemic, such as energy and financials, were the top gainers. However, rising Covid infections saw many European countries tighten restrictions. EU leaders approved the landmark €1.8 trillion budget package, including the €750 billion recovery fund, after overcoming opposition from Hungary and Poland. The EU agreed a Brexit trade deal with the UK.

UK

UK equities performed well over the quarter reversing some of the underperformance that they suffered versus other regions during the global pandemic’s initial stages. The market responded well to November’s vaccine news and then again to the Brexit trade deal, with domestically-focused areas of the market outperforming.

Asia (ex Japan)

The MSCI Asia ex Japan Index rallied strongly. South Korea was the best-performing index market, aided by strong gains from the tech sector. Indonesia, Taiwan, the Philippines and India also finished ahead of the index. Malaysia, China and Hong Kong generated more modest gains and underperformed. In China, tensions with the US, and anti-trust moves weighed on sentiment somewhat.   

Japan

Japanese equities rallied in the quarter, driven from early November by vaccine-related news and the US presidential election result. The style reversal seen in most markets has not yet materialised in Japan, with only a brief outperformance for value stocks, while small caps underperformed sharply in the quarter. The focus now is on the vaccine roll out, Japan’s general election timetable and the timing of a full corporate earnings recovery.

Emerging markets

Emerging market (EM) equities generated their strongest quarterly return in over a decade, with US dollar weakness amplifying gains. Korea, Brazil and Mexico all outperformed. The rally in commodity prices was supportive of EM net exporters. Conversely, Egypt, where daily new Covid-19 cases accelerated, posted a negative return. China finished in positive territory but also lagged. The launch of an anti-trust investigation into Alibaba and further escalation in US-China tensions dragged on sentiment.

Global Bonds 

Government bond yields diverged markedly. The US 10-year yield was 25 basis points (bps) higher, finishing at 0.91%, while the German 10-year yield fell by 5bps to -0.57%. Italian and Spanish 10-year yields saw significant declines of 32 and 20bps respectively, as the European Central Bank increased quantitative easing. The UK 10-year yield was little changed at 0.20%, as vaccine optimism was tempered by Brexit uncertainty and new lockdown measures.

Corporate bonds enjoyed a fruitful quarter, outpacing government bonds, with both investment grade and high yield delivering strong positive total returns. Investment grade bonds are the highest quality bonds as determined by a credit rating agency; high yield bonds are more speculative, with a credit rating below investment grade.

Convertible bonds gained 10.7%, benefiting from the tailwind of global stocks at record highs. This implies a strong 73% participation in the equity market gains in Q4. The primary market for convertibles has also reached highs not seen for the last ten years. All in all, $166 billion of new convertible bonds were issued in 2020. Valuations, especially in the US, have become more expensive, albeit from a lowly valued base.

Commodities

In commodities, the S&P GSCI Index registered a robust return in Q4. Vaccine news lifted hopes for a global economic recovery in 2021. US dollar weakness was also beneficial. Agriculture was the best-performing index component, driven higher by strong performance from soybeans and corn. The energy component also posted a positive return. Crude oil prices rallied as a stronger demand outlook offset concerns over increased supply. Industrial metals also gained, driven higher by copper and nickel. Precious metals were mixed, with silver generating a robust gain while the gold price fell. 


The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

Monthly Markets Review – November 2020

A look back at markets in November, in which stocks made record gains amid a decisive outcome in the US election and several successful Covid-19 vaccine trials.


  • Global equities rallied strongly in November, mainly due to several vaccines proving effective against Covid-19. The improved risk appetite saw corporate bonds outperform government bonds. 
  • US equities surged as vaccine breakthroughs sparked investor optimism that a return to economic normality is in sight. Joe Biden won the presidential election.
  • In the eurozone, expectations of global recovery supported shares, with the region a particular beneficiary given its high exposure to global trade.
  • UK equities performed well, helping them to recoup some of their year-to-date underperformance versus other regions. Sentiment was also helped by hopes that a “no-deal” Brexit might be avoided.
  • The MSCI Asia ex Japan index recorded its highest return in more than four years. US dollar weakness amplified returns.
  • Japan’s equity market rallied, driven by vaccine-related news and the slow-motion results from the US presidential election.  
  • Emerging market equities registered a robust return. Value outperformed growth, while Latin America and emerging Europe outperformed emerging Asia. 
  • Government bond yields were volatile during the month, with large swings around the US election and vaccines news. Corporate and emerging markets bonds performed well. 
  • Commodities delivered a positive return, aided in part by a weaker US dollar. Energy was the best-performing component. 

Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

US

US equities surged in November as several vaccine breakthroughs sparked investor optimism that a return to economic normality is in sight. The news eclipsed President-elect Joe Biden’s eventual victory in the US presidential election, and concerns over the smooth transition of power.

The most economically-sensitive areas of the US stock market rose the most sharply. Energy stocks were up markedly. Financials, industrials and materials also rose. The US dollar declined.

Eurozone

Eurozone shares surged in November with the MSCI EMU index gaining 17%. Positive news on vaccines supported shares, with the eurozone a particular beneficiary given the region’s high exposure to global trade.

There were also encouraging signs that Covid-19 infection rates are slowing in several European countries, enabling governments to start easing lockdown restrictions. Energy and financials were amongst the best-performing sectors.

UK

UK equities outperformed in November on the back of the positive vaccine news, helping them to recoup some of their year-to-date underperformance versus other regions.

Sentiment was also helped by hopes that a “no-deal” Brexit might be avoided. The standstill/transition arrangement within the EU-UK Withdrawal Agreement ends on 31 December 2020.

A notable rotation into value stocks prompted some debate as to whether the long-term dominance of so-called growth stocks may at last be challenged. Value stocks are those that appear to be trading for less than their intrinsic worth, while growth stocks are anticipated to grow at a rate significantly above the average for the market.

Asia (ex Japan)

The MSCI Asia ex Japan index recorded its highest return in more than four years as the news of vaccines boosted investor sentiment. US dollar weakness amplified returns. The ASEAN (Association of Southeast Asian Nations) markets of Thailand and Singapore led the index higher.

By contrast, China, which has outperformed significantly on a year-to-date basis, underperformed amid a rotation in market leadership. There was also rotation within the market, with internet stocks, which have outperformed year-to-date, dragging on market performance.

Japan

Japan’s equity market rallied in November, driven by vaccine-related news and the slow-motion results from the US presidential election.

However, the style reversal seen in most markets was very muted in Japan, with only a brief outperformance for value stocks, while small caps underperformed sharply.

In the near-term, the focus will be on the vaccine roll-out, Japan’s general election timetable and the scope for a full corporate earnings recovery. 

Emerging markets

Emerging market equities registered a robust return as vaccine news flow and the election of Joe Biden boosted risk appetite. Value outperformed the growth factor.

On a regional basis, Latin America and emerging Europe outperformed emerging Asia. Greece, Poland and Hungary were the best-performing index countries. Turkey outperformed as a new central bank governor and treasury and finance minister were appointed.

Global Bonds 

Government bond yields were volatile during the month. The US 10-year Treasury yield was three basis points (bps) lower at 0.84%, but saw large daily changes around the US election and news on vaccines.

In Europe, 10-year yields of Germany and France edged a little higher, to -0.57% and -0.33% respectively. Peripheral yields fell to low levels on news of vaccines and expectations that the European Central Bank could increase bond purchases. The Italian 10-year yield fell 13 bps to 0.63% and Spain’s fell 5 bps to 0.08%.

Corporate bonds performed well, with global investment grade producing a total return of 2.1% and high yield 4.1% (Source: ICE BofAML, local currency total returns). Investment grade bonds are the highest quality bonds as determined by a credit rating agency; high yield bonds are more speculative, with a credit rating below investment grade.

Emerging market hard currency bonds gained 3.9%, with corporate bonds rising 2.7%, both led by high yield. Local currency bonds returned 5.5%. EM currencies performed well against the US dollar, notably in Latin America (Source: JP Morgan).

Convertible bonds benefited from the tailwind of strong equity performance. The Thomson Reuters Global Focus index, which measures balanced convertible bonds, advanced 6.5%. Convertible bonds were highly sought after and valuations became more expensive.

Commodities

In commodities, the S&P GSCI Index delivered a positive return, aided in part by a weaker US dollar. Energy was the best-performing component, with strong gains for Brent crude as vaccine optimism boosted hopes for a sustained recovery in economic activity and energy demand. Industrial metals also posted a double-digit gain, driven by robust returns from lead, copper and aluminium.

Conversely, precious metals was the only component to record a negative return, as investor demand for safe-haven assets waned. Gold and silver fell. The agriculture and livestock components also underperformed, despite finishing in positive territory.


The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

Monthly Markets Review – October 2020

A look back at markets in October when Covid-19 lockdowns were reintroduced in much of Europe and investors awaited the US presidential election.


  • Global equities declined in October. The US presidential election and rising Covid-19 cases in many countries, notably across Europe, were the main focus for investors. Corporate bonds outperformed government bonds.
  • US shares fell amid rising Covid-19 cases, uncertainty over the presidential election and lack of progress on further fiscal stimulus.
  • Eurozone shares declined, underperforming other regions, as Covid-19 infections rose sharply and a number of countries reintroduced national lockdown measures.
  • UK equities fell amid renewed fears around a pick-up in Covid-19 cases. At the very end of the month, the UK government abandoned a tiered system in favour of uniform restrictions across England.
  • Japanese shares declined, largely due to the renewed uncertainty affecting other global regions. Japan’s success in containing the virus saw it announce measures to encourage consumer spending in restaurants.
  • Emerging market equities gained due to expectations of additional fiscal stimulus in the US. The prospect of more stable trade relations with the US under a potential Biden presidency also proved beneficial.
  • In fixed income , the US 10-year yield rose (meaning prices fell) which seemed to reflect rising hopes of economic stimulus. However, European yields fell (i.e. prices rose) as Covid-19 cases increased and lockdowns returned.
  • Commodities registered a negative return. Energy was the weakest component with crude oil falling sharply on concerns over weaker demand related to the coronavirus.

Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

US

US equities declined in October, primarily due to the continued rise in Covid-19 cases in many states. Market optimism over additional fiscal stimulus also waxed and waned, contributing to stock market movements. As the deadline for stimulus negotiations drew near, the unpredictability of the 3 November presidential election added to the wider sense of uncertainty. President Trump hinted more than once that stimulus would be announced post the election, should he win a second term.

From an economic perspective, data continued to indicate industrial activity was expanding in both the manufacturing and service sectors. Initial jobless claims also reached their lowest number since March. Even so, the Federal Reserve (Fed) maintained the message that it will keep rates unchanged until inflation stabilises at 2%, and will tolerate a moderate overshoot. Further, the Fed reiterated that additional fiscal stimulus was required.

The utilities sector – a relatively small component of the S&P 500 – was among the strongest performers in October, while the more significant communications sector made modest gains. All other sectors fell to one extent or another, with the technology, energy and healthcare sectors among the weakest areas of the market.

Eurozone

October saw shares fall in the eurozone as several countries reintroduced lockdowns to try and contain rising Covid-19 infection rates. France introduced a strict new national lockdown while partial lockdowns were announced in several other countries including Germany and Belgium. The European Central Bank kept monetary policy unchanged but indicated that more stimulus measures are likely to be announced at the next policy meeting in December.

Data showed that the eurozone economy expanded by 12.7% in the third quarter of 2020 as activity rebounded over the summer. However, this still leaves the economy 4.3% smaller than it was at the same time last year and expectations are that the new lockdowns will weigh on economic activity in the coming months. Indeed, business activity contracted in October according to the Markit composite purchasing managers’ index (PMI) which fell to 49.4. from 50.4 in September. 50 is the level that separates expansion in business activity from contraction. The PMI surveys are based on responses from companies in the manufacturing and services sectors. Annual inflation remained stable at -0.3% in October.

October saw the bulk of Q3 corporate earnings’ releases. These were largely positive, with many companies beating expectations. Nevertheless all sectors ended the month in the red. Information technology was among those seeing the steepest falls. German software company SAP cut its revenue and profit forecasts for the year. The energy sector also fell sharply with lockdowns likely to mean reduced demand for oil. The telecommunication services sector was among the more resilient over the month.

UK

UK equities fell over the period amid renewed fears of a pick-up in Covid-19 cases. Policymakers in Wales and Northern Ireland used devolved powers to implement new countrywide lockdowns, while Scotland introduced a tiered system. At the very end of the month, the UK government abandoned its own tiered system in favour of uniform restrictions across England, to run initially for four weeks from 5 November until 2 December.

In response to these events, the UK government announced it would extend the Coronavirus Job Retention Scheme, or furlough scheme, until December. Employees will receive 80% of their current salary for hours not worked, up to £2,500 a month. This scheme was due to be superseded by the Job Support Scheme (JSS) in November, as part of Chancellor Rishi Sunak’s “Winter Economy Plan”. 

Expectations built that the Bank of England (BoE) would use its November policy meeting to extend quantitative easing. It also emerged that the bank’s deputy governor, and CEO of the Prudential Regulation Authority, Sam Woods wrote to UK banks to ask them how ready they might be for negative interest rates.

Japan

The Japanese equity market lost ground for most of October, ending the month 2.8% lower. The yen moved steadily stronger against the US dollar, which had a slight negative impact on sentiment.

Style factors had a smaller influence on overall performance in October, although small cap stocks were weaker than the overall market, reversing some of the sharp outperformance seen in September.

With few new incentives domestically, the primary market drivers came from pre-existing factors, including the global resurgence of Covid-19, the US presidential election, and the likelihood of additional fiscal stimulus in major economies.

Japan’s experience of Covid-19, in terms of incidence and mortality, continues to be markedly different from the US and Europe. As a result, the government has been able to continue to encourage private consumption through its “Go To” campaign for domestic travel. In October, this was supplemented by the launch of “Go To Eat” discounts to support local restaurants in each prefecture. Domestic economic data continues to reflect a slow but steady recovery after a downturn seen earlier in the year that, although severe, was less dramatic then many other countries.

The corporate results season for the June to September quarter started in late October. Initial indications are good, with a significant proportion of companies beating consensus estimates. Although the full picture will not be clear until November, the announcements made so far seem to support further upward revisions to profits across many sectors in the second half of this fiscal year.

Asia (ex Japan)

The MSCI Asia ex Japan Index delivered a positive return in October, comfortably outperforming the MSCI World Index. Nearer month-end, worries about Covid-19 resurfaced as did US election uncertainty. Indonesia was the best-performing index market, as parliament passed the Omnibus Law which incorporates a number of labour market and tax reforms. The Philippines, where Covid-19 related restrictions were eased, and China also delivered strong gains and outperformed the index. Hopes of a Biden win in the US election – and potentially a smoother road forward for US-China relations – were supportive of Chinese equities, as was the performance of its internet companies and a number of positive Q3 earnings surprises.

Taiwan, India and Korea all finished in positive territory but underperformed the index. Earnings forecasts for Taiwan’s companies increased as the outlook for growth improved. In India, the number of daily new cases of Covid-19 continued to fall after the peak in the middle of September. The weakest index market was Singapore followed by Thailand, and Malaysia and Hong Kong SAR also lagged behind.

Emerging markets

Emerging market (EM) equities posted a solid gain as expectations for additional fiscal stimulus in the US increased. It followed a widening of Democratic Party candidate Joe Biden’s lead in opinion polls, ahead of the 3 November election. The MSCI Emerging Markets Index increased in value and outperformed the MSCI World.

Indonesia was the best performing EM market, as the approval of the Omnibus Law boosted sentiment. The Philippines, where Covid-19 restrictions were further eased, Mexico and China were the only other markets to outperform the EM index. In China, strong performance from internet stocks was beneficial. The prospect of more stable trade relations with the US under a prospective Biden presidency also proved supportive for stocks.

By contrast, Poland recorded a negative return and was the weakest market in the index. Daily new cases of Covid-19 accelerated and, later in the month, protests against the government broke out across the country. Greece and Turkey also finished firmly in negative territory and underperformed the index.

Global bonds

Markets were volatile in October, with mixed performance from bonds. Corporate bonds held up well overall. Concerns around Covid-19 were heightened. A resurgence of cases in Europe resulted in renewed lockdowns in Germany and France toward month-end and case numbers remained elevated in the US.

The middle of the month saw a burst of investor optimism as US politicians said negotiations over a stimulus package were progressing. Democrat presidential candidate Joe Biden, who favours a large stimulus, continued to lead in the polls. Sentiment reversed sharply in the last week of the month, on concerns over Covid, with the US dollar gaining against the euro and finishing slightly higher on the month. 

Government bonds diverged over the month. The US 10-year Treasury yield rose by 19 basis points (bps) to 0.87%, with the 2-year to 10-year yield curve steepening by 16bps (rising yields mean falling prices). Aside from expectations of stimulus, US data was reasonably positive. Weekly jobless claims fell below 800,000 for the first time since March.

European 10-year yields fell by 10bps across the board amid the continued resurgence of Covid-19. Germany’s 10-year yield finished at -0.63% and France’s at -0.34%. In the “periphery”, Italy’s 10-year yield dropped to 0.76% and Spain’s to 0.13%. The UK 10-year yield was 3bps higher at 0.26%. Economic indicators for Europe and the UK pointed to a loss of momentum, with Europe dipping back into contractionary territory.

Corporate bonds outperformed government bonds. US investment grade debt saw a marginal negative total return (local currency), as yields rose, but was comfortably ahead of US Treasuries. Eurozone investment grade returned 0.8%. Corporate bonds held up relatively well amid the sharp reversal in sentiment in the last week of the month (Source: ICE BofAML).

The performance of emerging market (EM) bonds was mixed. Hard currency (US dollar)-denominated bonds were flat after a late pullback, mainly in high yield, while EM corporate bonds made a modest positive return. Local currency bonds were also moderately positive. EM currencies were again mixed, but slightly higher overall. The Chinese renminbi and Thai baht performed well, while the Turkish lira and Brazilian real weakened.

Convertible bonds proved very resilient versus equities. The Thomson Reuters Global Focus index, which measures balanced convertible bonds, registered a positive return in the falling equity market environment. The index returned 0.4% compared to -2.5% for the MSCI World global equity index. Convertible bond valuations became slightly more expensive, albeit from a low base.

Commodities

Commodities, as measured by the S&P GSCI Index, registered a negative return. Energy was the weakest component with crude oil falling sharply on concerns over demand related to the coronavirus. Livestock and precious metals also lost ground, though they fell by less than the index. Industrial metals rose, aided by strong gains for copper and zinc, and agricultural commodities posted positive returns.


The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

Quarterly Markets Review – September 2020

A review of markets in the third quarter when global equities moved higher, led by Asia.


  • Global equities gained in Q3 but regional performances diverged with Asia and the US outperforming Europe and the UK. Government bond yields were little changed, however, corporate bonds enjoyed a positive quarter.
  • US shares gained in Q3, supported by signs of economic recovery and loose monetary policy. The Federal Reserve will now use average inflation targeting in setting interest rates, allowing for temporary overshoots in inflation.
  • Eurozone shares were virtually flat, lagging behind global markets as Covid-19 infections rose sharply in several countries and local restrictions to curb the virus were reintroduced.
  • UK equities fell during the period – extending their year-to-date underperformance of other regions – with the market’s significant exposure to poorly performing stocks in the oil and financial sectors proving unhelpful.
  • Japanese shares gained over the quarter, despite the yen strengthening. Shinzo Abe resigned as prime minister and was replaced by Yoshihide Suga.
  • Emerging market (EM) equities advanced in Q3 2020, despite a further acceleration in new cases of Covid-19 in certain countries, and an escalation in US-China tensions.
  • Government bond yields were generally little changed although European yields fell (meaning prices rose) after news of the €750 billion recovery fund. Corporate bonds had a positive quarter.
  • Commodities delivered a positive return. Livestock and agriculture were the best-performing components while industrial metals posted a strong gain.

Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

US

US equities gained in Q3 despite a decline in September as risk appetites slipped. Overall, the US economy’s recuperation continued, and the Federal Reserve’s (Fed) messaging remained highly accommodative. The Fed will now use average inflation targeting (AIT) in setting the policy interest rate, allowing for temporary overshoots in inflation. The new policy means the Fed is willing to wait until inflation has gone above 2% until it responds. Furthermore, the latest dot plot – the Fed’s own projection of the future path of interest rates – suggests that policymakers see rates at the zero lower bound through to and including 2023. However, US markets wobbled late in the quarter amid a resurgence in European Covid-19 cases, as well as questions over refreshed fiscal stimulus measures. Adding to these worries was uncertainty over a smooth transition of power if President Trump loses his re-election bid.

The US unemployment rate dropped to 8.4% in August, down from 10.2% in July and below consensus expectations of 9.8%. The labour force participation rate also improved, but it is still below its February pre-pandemic level. Industrial production rose for the fourth consecutive month in August, albeit at a much lower rate than earlier in the summer, signalling a slowing recovery in manufacturing. Similarly, retail sales increased in August, but again at a slower rate and below consensus expectations. Spending at food and beverage stores continued to be strong.

Consumer discretionary stocks – particularly restaurants and appliances or apparel retailers –  performed well. Distribution companies were stronger and helped to lift the industrials sector, at odds with the performance of several airlines still facing headwinds from languishing passenger numbers. Energy names – similarly – were broadly weaker on expectations that fuel demand will remain subdued.

Eurozone

Eurozone equities were virtually flat over the quarter. The rate of improvement in economic data slowed over the quarter and worries took hold over sharply rising Covid-19 infections in many European countries. The energy and financials sectors saw the sharpest falls while materials and consumer discretionary advanced, with automotive and luxury goods stocks generally faring well.

In July, the EU approved a €750 billion fund to help member states recover from the pandemic. The fund will be made up of €390 billion of grants and €360 billion of loans to be distributed among EU member states. The money will be borrowed by the European Commission and guaranteed by all EU member states. Covid-19 infections rose rapidly in several countries as the quarter progressed, notably Spain and France, and new restrictions to contain the virus were announced. However, these restrictions tended to be localised, rather than the blanket countrywide measures seen in the first phase of the virus. Various European countries, including Germany, extended their furlough schemes which are designed to support jobs through the crisis.

Business activity stalled in September with the flash purchasing manager’s index (PMI) falling to 50.1, down from 51.9 in August. 50 is the level that separates expansion in business activity from contraction. The PMI surveys are based on responses from companies in the manufacturing and services sectors. Eurozone annual inflation turned negative, at -0.2% in August compared to 0.4% in July.

UK

UK equities lagged behind other regions during the period – extending their year-to-date underperformance – with the market’s significant exposure to poorly performing stocks in the oil and financial sectors proving unhelpful. Renewed fears around a disorderly Brexit also weighed on sentiment, as did worries towards the end of the period around the implications of a second wave in Covid-19 infections. Rising infection rates necessitated the re-imposition of localised restrictions following similar measures taken in continental Europe.

Notwithstanding these new measures, the country’s economic recovery continued as Covid-19 restrictions were generally eased. The second quarter reporting season underlined increased corporate confidence with many companies resuming guidance on their likely financial performance for the rest of 2020. Where they felt it appropriate, a number of others also resumed the payment of dividends that they had deferred in the spring – many of these payments had been deferred just prior to the AGM season and at a time of peak uncertainty related to the global pandemic.

A number of UK focused areas of the market, and mid cap equities in particular, performed poorly over September following the re-imposition of localised restrictions and fears about the impact of these on the UK economy. However, many domestically focused areas performed well over the quarter as a whole as their valuations began to reflect the more encouraging macroeconomic data seen over the summer. In contrast, sterling strength against a weak dollar weighed on large UK companies with exposure to international markets, as a stronger pound makes their products more expensive. There was renewed merger & acquisition interest from overseas firms in UK quoted companies at period end.

Japan

The Japanese equity market trended upwards during the quarter and the Topix Index recorded a total return of 5.2%. This was despite a gradual strengthening of the yen against the US dollar over the period. There were some brief periods of style reversal but, across the quarter as a whole, the market was led by strong momentum in higher-valuation stocks. Small cap stocks were notable outperformers in September and have now more than recouped the sharp underperformance seen during the market turmoil in the first quarter of the year.

Domestically, the quarter was dominated by the change in Japan’s prime minister. Shinzo Abe announced his resignation as prime minister of Japan on 28 August, due to the resurgence of a long-standing health problem, just four days after he recorded the longest continuous term of any Japanese prime minister. Following his resignation, Yoshihide Suga, the Chief Cabinet Secretary, quickly emerged as the frontrunner and he duly won the LDP’s leadership election on 14 September. His position as the new prime minister was then confirmed in a special Diet session on 16 September.

The change in leader had little impact on the overall market. However, Mr Suga’s widely reported comments on the scope for mobile charges to be reduced led to underperformance across the telecom sector in September. The exception to this was mobile operator NTT DoCoMo. In an unexpected move, the parent company, NTT, which already owns 66% of DoCoMo, offered a significant premium to minority shareholders to acquire the remaining 34%. There were several other high-profile corporate developments, including the announcement of a planned merger of two major leasing companies, Mitsubishi UFJ Lease and Hitachi Capital.

Although corporate profits are clearly under pressure, the quarterly earnings reporting season, which concluded in early August, brought more positive surprises than we might have expected. Economic data released in the last few weeks has also been slightly skewed to positive surprises, especially in industrial production, which saw a larger rebound than expected. Inflation, however, has trended slightly below expectations, partly as a result of targeted government policy to provide discounts on domestic travel and education.

Asia (ex Japan)

Asia ex Japan equities recorded a strong return in Q3, led by Taiwan, where IT sector stocks underpinned gains. India, Korea and China all posted double-digit returns and outperformed the MSCI Asia ex Japan index. In India, relatively good monsoon rains were supportive and towards the end of the period the government also passed agricultural and labour reforms. This was despite further increase in the number of daily new cases of Covid-19, and as tensions with China on the Himalayan border persisted. In China, economic data signalled ongoing recovery and Q2 corporate earnings results were positive. However, tensions with the US escalated, including new restrictions on Chinese telecoms company Huawei, and as President Trump signed an executive order to prevent US companies from doing business with TikTok and WeChat.

Conversely, Thailand and Indonesia and, to a lesser extent, the Philippines and Singapore all finished in negative territory and underperformed the index. In Thailand, the lack of improvement in the tourism sector was a drag on the economic recovery. In Indonesia, Covid-19 cases rose and had an increasing impact, especially in rural areas. As a result, tighter restrictions were brought in for Jakarta.

Emerging markets

Emerging market equities registered a robust return in Q3, aided by optimism towards progress on a Covid-19 vaccine and ongoing economic recovery. US dollar weakness proved supportive. The MSCI Emerging Markets Index increased in value and outperformed the MSCI World.

Taiwan, where strong performance from IT stocks supported gains, and South Korea were among the best-performing index markets. India outperformed the MSCI Emerging Markets Index as monsoon rains remained reasonable and the government made progress with agriculture and labour reforms. This was in spite of continued increases in the number of new Covid-19 cases as well as tensions with its border with China. China also finished ahead of the index as the economy continued to recover. Q2 GDP growth rebounded to 3.2% year-on-year, after a fall of -6.8% in Q1, and was stronger than expected. Q2 earnings results were also ahead of expectations, notably in the e-commerce sector. However, US-China tensions continued to escalate. These included additional measures against Chinese technology companies, and President Trump’s executive order to end Hong Kong SAR’s special status with the US.

Conversely, Turkey recorded a negative return and was the weakest market in the index, primarily due to lira weakness. This was despite a 200bps interest rate rise from the central bank in September. Thailand and Indonesia underperformed, as did the CE3 markets of Poland, Czechia and Hungary, as new cases of Covid-19 increased. Russia and Brazil also finished behind the index. In Russia, uncertainty over US foreign policy due to the US presidential election and, later in the period, crude oil price weakness, weighed on sentiment. In Brazil, concern over the fiscal outlook was the main headwind.

Global bonds

The tone was predominantly positive or “risk on” in markets over the quarter, underpinned by policy measures, the gradual reopening of economies and, to some degree, hopes of a Covid-19 vaccine. The Federal Reserve (Fed) announced a change to its inflation targeting regime in August, saying it would target an average 2% inflation rate, allowing periods of overshoot. This was well received by markets.

September was saw a more muted tone in markets amid rising Covid infection rates and renewed localised lockdowns in some countries. US election uncertainty began to build, particularly concerns that the outcome will be contested, and the Fed disappointed by leaving policy unchanged.

Government bond yields were mixed. The US 10-year yield finished at 0.68%, three basis points (bps) higher, with the UK 10-year yield six points higher at 0.23%. The UK yield fell in September as Brexit uncertainty resumed and there was further discussion of negative interest rates from the Bank of England.

European government bonds performed well as sentiment toward the region improved markedly after the EU announced a €750 billion pandemic recovery fund. The German 10-year yield fell by 7bps, finishing at -0.52%, while Italy’s yield fell by 39bps and Spain’s by 22bps. The euro gained over 4% against the US dollar, while the dollar index lost just over 3.5% overall.

Corporate bonds enjoyed a decidedly positive quarter, as riskier assets were broadly buoyant and monetary policy helped anchor yields at low levels. Investment grade returned 1.8%, while high yield debt returned 4%. Sectors worst affected by Covid, such as retail and leisure, partialy recovered (source: ICE BofAML). Investment grade bonds are the highest quality bonds as determined by a credit rating agency; high yield bonds are more speculative, with a credit rating below investment grade.

In emerging markets, hard currency government bonds returned 2.3% and corporate bonds returned 2.6%. Hard currency refers to money that is issued by a nation that is seen as politically and economically stable, such as US dollars. Local currency bonds made a modest positive return, while EM currencies were mixed, but slightly negative overall (source: JP Morgan).

Convertible bonds, as measured by the Thomson Reuters Global Focus index, gained 5.5% in US dollar terms, compared to 7.9% for the MSCI World equity index. The asset class delivered well in the quarter’s differing market environments, with a strong upside participation in the first two months – when shares gained – and good resilience in the last month when shares came under pressure. With equity markets strongly up over the quarter as a whole, convertible bonds were in demand and the US region in particular became more expensively valued from what had been cheap levels.

Commodities

Commodities, as measured by the S&P GSCI Index, delivered a positive return in the third quarter, aided in part by US dollar weakness. Livestock and agriculture were the best-performing components. Industrial metals posted a strong gain, led by steel, iron ore and zinc. The positive return from precious metals was driven mainly by a rally in the silver price. Energy was the only component to finish in negative territory, posting a slight fall. Crude oil prices fell back in September amid concern over the sustainability of the recovery in global growth. An extension of supply cuts from OPEC (the Organisation of Petroleum Exporting Countries) and partner nations also remained unclear.  


The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

Monthly Markets Review – August 2020

A look back at markets in August when hopes of a Covid-19 vaccine and a shift in Federal Reserve policy helped to support shares.


  • Shares were broadly higher in August amid hopes for a Covid-19 vaccine, signs of continued economic recovery and ongoing policy support measures. Government bond yields rose (meaning prices fell).  
  • US equities – as represented by the S&P 500 – reached a new peak. The Federal Reserve confirmed its readiness to offer further support, while increasing its flexibility to do so by adjusting how it targets inflation.
  • Eurozone shares rose. Top performing sectors included economically-sensitive areas like industrials and consumer discretionary. There were concerns about rising Covid-19 infections in some countries, notably Spain.
  • UK shares also gained. Signs there could be a solid recovery in the domestic economy during Q3 2020 helped UK small and mid cap equities play a supportive role for the market over August.
  • Japanese shares gained too. Late in the month, Shinzo Abe announced his resignation as prime minister, citing a long-standing health problem.
  • Emerging market (EM) equities recorded a positive return as hopes for a Covid-19 vaccine increased, and on the Federal Reserve’s suggestions that US interest rates could remain low for longer.
  • In fixed income, government bond yields rose (meaning bond prices fell) and the US dollar continued to decline. Corporate and emerging market bonds performed well.
  • In commodities, precious metal prices rose with US dollar weakness providing a strong tailwind.

Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

US

US equities – as represented by the S&P 500 – reached a new peak in August, in spite of tensions between the US and China escalating. What began as the two nations exchanging trade blows has now developed into restrictions on diplomats and military posturing. However, the ongoing stand-off was overshadowed through the month by economic data, which, while patchy, suggests that the economic recovery continues.

The Federal Reserve (Fed) also confirmed its readiness to offer further support, while increasing its flexibility to deliver it by adjusting its measurement of inflation. Although the Fed anticipates inflation to remain “soft”, it is also adopting “average inflation targeting” to allow temporary tolerance of increases beyond the 2% target.

Year on year inflation (core CPI) rose to 1.6% (in July) from a trough of 1.2%, driven by a continued reversal of gasoline prices – which rose by 5% in July – as well as higher prices for apparel, used cars and airfares. In the meantime, the number of Americans applying for unemployment benefits fell below 1 million for the first time since the pandemic began in March. However, retail sales in July increased by less than expected and consumer confidence remains subdued.

The IT sector was again a notable contributor to the market’s overall gains in August. Sectors exposed to an improving economic cycle, such as industrials and consumer discretionary, also rose. Utilities and real estate were weaker areas, as were energy stocks.

Eurozone

Eurozone equities notched up gains in August but lagged behind other regions. Top performing sectors included economically-sensitive areas of the market like industrials and consumer discretionary. The healthcare sector was among the laggards, after a strong performance so far this year, as investors favoured parts of the market deemed more likely to benefit from economic recovery. Within individual industries, automakers were buoyed by data showing rising car sales in China. The Q2 earnings season concluded and was overall better than expected. The euro strengthened further against the US dollar.

Data confirmed that the eurozone economy contracted by -10.1% in Q2. However, the German economy’s fall was revised to a smaller decline of -9.7% from -10.1% previously. There was continuing unease about rising Covid-19 infections in some countries, notably Spain and France, with various countries imposing some form of travel restrictions. Meanwhile, Germany extended its scheme to top up the pay of workers affected by the pandemic; this was due to expire in March 2021 but will now run until the end of next year.

Recovery momentum slowed, according to the latest purchasing managers’ indices (PMIs). The composite index for August reached 51.6 compared to 54.9 in July. (50 is the level that separates expansion from contraction. The PMI surveys are based on responses from companies in the manufacturing and services sectors).

UK

UK equities rose over the period as risk appetite recovered generally due to the improving global growth outlook. Signs there could be a solid recovery in the UK economy over Q3 2020 were also supportive of small and mid cap (SMID) equities. As a result, the market recouped some of its losses from July when fears around a second wave of Covid-19 infections had dominated sentiment.

The market was led higher by economically-sensitive areas, including some of the sectors where activity had been hit hardest during the pandemic. Corporate news in many of these sectors improved and began to reflect the more encouraging macroeconomic data seen over the summer. These trends contributed to the outperformance of domestically-focused equities and UK SMIDs at a time when sterling strength against a weak dollar weighed on internationally-exposed large caps.

The summer rebound in UK economic activity, helped by fiscal policy support and a relatively milder resurgence in new Covid-19 cases versus some other territories, could set the UK up for a solid recovery over Q3. A potential pick-up in job losses remains the big unknown. While the latest data from the Office for National Statistics confirmed that the UK economy had entered a recession in Q2, the market focused on news that monthly GDP had grown by 8.7% in June 2020, supporting hopes for a reasonably sharp Q3 rebound.

Japan

In August, the Japanese equity market quickly regained the ground lost at the end of July, then traded sideways for the rest of the month to end 8.2% higher. Speculation over the potential resignation of Prime Minister Abe arose during market hours on Friday 28 August, and caused a small dip in share prices. His resignation was confirmed later that day and, by the end of trading on Monday 31 August, the market was basically unchanged across the two days. The yen did strengthen on the announcement but, for the month as a whole, there was a small net weakening against most major currencies.

Shinzo Abe’s resignation, due to the resurgence of a long-standing health problem, came just four days after he recorded the longest continuous term of any Japanese prime minister. His popularity has declined recently, primarily due to his handling of Japan’s response to the pandemic. In recent weeks, an uptick in new infections cases, albeit from a very low base, has led to further criticism of perceived policy inconsistencies. The LDP has now opted for the simplest method by which their next party president can be elected, and this is likely to take place on 14 September. Yoshihide Suga, currently Chief Cabinet Secretary, has emerged as the front-runner in early September.   

Away from politics, although corporate profits are clearly under pressure, the recent quarterly earnings season brought more positive surprises than might have been expected. The pandemic has made it very hard to form a clear consensus for earnings, with many companies unwilling to provide their usual guidance due to the extreme uncertainty. However, on our estimates, around 40% of companies beat market expectations, with 40% in line and 20% underperforming. This compares to a more typical split of roughly one third in each category. Economic data released in the last few weeks has also been slightly skewed to positive surprises, especially in industrial production which saw a larger rebound than expected.

Asia (ex Japan)

The MSCI Asia ex Japan index posted a strong return, aided by hopes for a Covid-19 vaccine and ongoing economic recovery, as well as US dollar weakness. The index was led higher by strong performances from China and Hong Kong SAR, where Covid-19 infection rates fell and most sectors advanced. In China, upside surprises in Q2 earnings results boosted sentiment, and exports expanded strongly, though there were rising tensions with the US. Although China’s commitment to Phase I of the US-China trade deal was a positive, other tensions included sanctions on technology giant Huawei by the US.

Meanwhile, China and India had their own border skirmishes near month end, leading India to give back some of its strong performance generated earlier in the month. Nevertheless, India performed broadly in line with the index, despite the continued rise in Covid-19 cases.

Conversely, Malaysia, Thailand and Taiwan finished in negative territory and were the weakest index performers. Taiwanese equities fell amid weakness among IT stocks. Apple supply chain stocks in particular were negatively impacted by the US-China tensions.

Emerging markets

Emerging market (EM) equities recorded a positive return as hopes for a Covid-19 vaccine increased, and as the Fed’s new monetary policy strategy suggested that interest rates could remain low for longer. The MSCI Emerging Markets Index increased in value but underperformed the MSCI World Index

Egypt was the best-performing market in the MSCI Emerging Markets Index. China outperformed as stronger-than-expected Q2 earnings results, notably in the e-commerce sector, boosted sentiment. This was despite an escalation in US-China tensions.

A pick-up in materials and energy prices was supportive of net exporter EM countries including Peru, the UAE, Saudi Arabia and Qatar, all of which outperformed the index. The reciprocal UAE-Israel diplomatic recognition also boosted sentiment towards Middle Eastern markets. India finished ahead of the index. This was despite further acceleration in daily new cases of Covid-19, and renewed tensions on its border with China on the final day of the month.

By contrast, Chile and Brazil finished in negative territory and were the weakest index markets, with weakness amplified by currency depreciation. Turkey, where lira weakness amplified negative returns, and to a lesser extent Taiwan also underperformed.

Global bonds

Investor sentiment and risk appetite remained strong in August. Government bond yields rose (bond prices and yields move inversely of each other) and the US dollar continued to decline, while corporate and emerging market bonds performed well.

Investors shrugged off further concerns over Covid-19 with the focus on the Federal Reserve’s annual conference at Jackson Hole late in the month. The Fed, significantly, announced that it would tolerate higher inflation, dispensing with its 2% target in favour of a 2% average level. This strengthened investor expectations that highly accommodative monetary policy will remain in place for a long time yet. The global economy showed further signs of modest recovery.

The US 10-year Treasury yield rose by 18 basis points (bps) to 0.70% over the month, while in Europe, Germany’s 10-year yield was 13bps higher at -0.40%, with France’s rising by 10 to -0.10%. Italy and Spain outperformed, with their 10-year yields rising by eight and seven bps respectively. The UK 10-year yield rose by 21 points to 0.31%.

Corporate bonds outperformed government bonds. High yield credit led amid strong risk appetite, with a continued rebound in those sectors most impacted by Covid-19, such as leisure. Investment grade corporate bonds saw negative total returns (local currency) due to rising yields. Investment grade bonds are the highest quality bonds as determined by a credit rating agency; high yield bonds are more speculative, with a credit rating below investment grade.

Emerging market (EM) government and corporate bonds (hard currency) produced further positive returns, though at a more moderate pace, led by high yield. Local currency denominated EM debt was slightly lower and there were mixed performances from EM currencies. The Mexican peso, Chinese yuan and Indian rupee gained against the dollar, while the Brazilian real and Turkish lira weakened.

The Thomson Reuters Global Focus index, which measures convertibles, was up 2.6% this month compared to a 6% gain for the MSCI World equity index. Convertibles were in demand by global investors and valuations became more expensive – especially in the technology heavy US segment of the market.

Commodities

The S&P GSCI (commodities index) registered a positive return. Agriculture was the strongest component, with corn and soy beans recording particularly robust returns. Energy and industrial materials components also delivered strong gains. Energy price rises were driven by increased demand as economic activity continued to pick up globally. Nickel and zinc drove gains in industrial metals, amid increased demand from China. In precious metals, silver continued to generate stellar gains while gold slightly lost ground.


The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.