Quarterly Markets Review – Q3 2021

A look back at markets in Q3, which started well for shares but then saw gains erased amid rising inflation and worries over China.

  • Developed market shares were flat (in US dollar terms) in Q3. Declines in September erased prior gains. Emerging market equities underperformed amid a sell-off in China.
  • Global sovereign bond yields were little changed in the quarter. The US Federal Reserve said it would soon slow the pace of asset purchases.
  • Commodities gained with natural gas prices seeing a sharp spike.   

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 equities notched up a small positive return in Q3. Strong earnings had lifted US stocks in the run up to August, when the Federal Reserve (Fed) seemed to strike a dovish tone, confirming its hesitance to tighten policy too fast. However, growth and inflation concerns late in the quarter meant US equities retraced their steps in September.

The Fed stated in September that tapering of quantitative easing (i.e. a slowdown in the pace of asset purchases) will be announced at the November meeting, as expected, and will finish by mid-2022. Meanwhile, the fed funds rate projections now show a faster rate hiking schedule than they did in June. The median rate expectation for 2023 moved up to three hikes from two in June, with three additional hikes in 2024. Fed officials were evenly split 9-9 on a rate hike in 2022.

The shift comes in the context of revised real GDP growth – down to 5.9% for 2021 from the 7% growth estimated in the last meeting – while inflation has risen. The Fed now sees inflation running to 4.2% this year, above its previous estimate of 3.4%. The Fed raised its GDP projections for 2022 and 2023 to growth of 3.8% and 2.5%, respectively.

On a sector basis, financials and utilities outperformed. At the other end of the spectrum, industrials and materials struggled, although September’s sell-off hit almost all sectors. Energy was an exception, rising as supply constraints drove prices to highs – particularly Brent crude.


Eurozone equities were flat in Q3. The energy sector was one of the strongest performers, as was information technology with semiconductor-related stocks seeing a robust advance. Consumer discretionary stocks were among the weakest for the quarter, with luxury goods companies under pressure amid suggestions that China could seek greater wealth redistribution, which could hit demand.

The quarter had started with gains amid a positive Q2 earnings season and ongoing economic recovery from the pandemic. The Delta variant of Covid-19 continued to spread but most large eurozone countries have now fully vaccinated around 75% of their population against the virus, enabling many restrictions on travel and other activities to be lifted.

However, as the period progressed, worries emerged over inflation due to supply chain bottlenecks and rising energy prices. Annual inflation in the eurozone was estimated at 3.4% in September, up from 3.0% in August and 2.2% in July. The European Central Bank said that it would tolerate any moderate and transitory overshoot of its 2.0% inflation target.

The end of the period saw a surge in power prices as a result of low gas supply and lack of wind over the summer, among other factors. High power prices should be positive for utility firms. However, the sector – particularly in southern Europe – is susceptible to political intervention as evidenced by announcements of price caps in Spain and other countries. The utilities sector was a laggard in the quarter.

Germany held a general election which saw the Social Democrats (SPD) take the largest share of the votes. Coalition talks are now under way over the formation of a new government.


UK equities rose over Q3 with the market driven by a variety of factors. While there were some clear sector winners (such as energy on the back of a recovery in crude oil prices) the difference between the best and worst-performing stocks, or dispersion, was quite marked. Within consumer staples, for instance, some of the more highly valued consumer goods companies performed poorly, while the more lowly valued grocery retailers performed well.

Merger & acquisition (M&A) activity remained an important theme. The period began with a recommended counter-offer for Wm Morrison Supermarkets and bid activity was seen across a variety of areas. Gaming remained an area of interest, with a proposal from US sports betting group DraftKings to acquire Entain. Within industrials there was headline-grabbing bid for aerospace and defence equipment supplier Meggitt. This in part explains the positive contribution from the consumer discretionary and industrial sectors, with the latter also helped by the easing of transatlantic travel restrictions and dollar strength against some weakness in sterling.

Small and mid cap (SMID) equities suffered in line with higher growth areas of the market more generally in September, but performed very well over the quarter a whole. SMID caps remained a sweet spot for M&A activity and made a useful contribution to overall market returns.

The Bank of England took a more hawkish tone as inflationary pressures continued to surpass expectations. Business surveys confirmed that supply bottlenecks are constraining output. Natural gas and fuel shortages made headlines towards the period end. These developments were also reflected in higher market interest rates, which helped support financials. However, Asian focused banks were lower in the period given the growing uncertainty around the outlook for Chinese markets and the economy.


The Japanese equity market traded in a range through July and August before rising in September to record a total return of 5.2% for the quarter. The yen showed little trend against the US dollar for most of the period before weakening at the very end of September to reach its lowest level since the start of the pandemic in early 2020.

Throughout the pandemic, Japan has consistently seen a lower infection rate than most developed countries but faced a much more serious test during early summer as infections picked up rapidly. Public opposition towards the government’s approach ratcheted up again and the approval rate for the Suga cabinet fell to the lowest levels seen since he took office in September 2020.

On 3 September, in a surprise decision, Prime Minister Suga announced his intention to resign without contesting the LDP leadership election. Mr Kishida was ultimately elected as LDP party leader and becomes Japan’s 100th prime minister. An establishment politician within the LDP, Mr Kishida should be essentially a safe, if unexciting, choice to guide Japan through the next stage of its post-Covid recovery. There is unlikely to be a change in the direction of monetary or fiscal policy as a result, and the likely shape of next major stimulus package should emerge over coming weeks..

It now seems likely that the upcoming general election could be held at the earliest practical date, on 31 October or, at the latest, mid November. Mr Kishida also inherits a stronger position in the vaccination programme which has sustained strong momentum in recent months after the very slow start seen in the first half of the year.

Although corporate results for the quarter that ended in June were strong, sentiment was impacted in August by the announcement from Toyota Motor of production cuts in September and October, due to the global shortage of semiconductors. Elsewhere for corporate Japan, order trends and capital expenditure plans continue to look strong.

Asia (ex Japan)

Asia ex Japan equities recorded a sharply negative return in the third quarter, largely driven by a significant sell off in China. This was partially due to concerns over the ability of property group Evergrande to service its debts. The Evergrande situation sparked global investor concerns over potential spill over risks.

Market concerns over inflation and the outlook for interest rates also dampened investor confidence during the quarter. China was the worst-performing index market, with sentiment towards the country also weakened by the government’s regulatory crackdown affecting the education and technology sectors. Power outages in China and the rationing of energy also spooked investors, hurting production of key commodities. The downside risks in China have significantly increased against a backdrop of slowing economic activity and concerns that recent regulatory policies will further weigh on growth.

Pakistan was also sharply weaker as ongoing political upheaval in neighbouring Afghanistan weakened investor sentiment towards the country, with fears that violence and unrest could spill over into Pakistan. Hong Kong and South Korea followed China lower, with both markets sharply lower as market jitters over China spilled out into the wider region.

India was the best-performing index market during the quarter and achieved a strongly positive performance as accommodative monetary policy and the easing of Covid-19 restrictions boosted investor sentiment. Indonesia also achieved a positive return. Singapore was almost unchanged, while declines in Taiwan and the Philippines were modest compared with the falls seen in other index markets.

Emerging markets

Emerging market (EM) equities declined in Q3, which saw a sell-off in Chinese stocks, concern over continued supply chain disruptions, and worries over the implications of higher food and energy prices for some markets. US bond yields rose towards the end of the quarter. Regulatory actions in China were the initial trigger for market weakness. These were compounded by the re-imposition of some Covid-19 restrictions and supply chain disruption in August, worries about possible systemic financial system risks stemming from the potential collapse of Evergrande, and power shortages.

Brazil was the weakest market in the MSCI EM index as above-target inflation continued to rise and the central bank responded with further interest rate hikes. Meanwhile Q2 GDP growth disappointed, developments in China weighed on industrial metals prices, and political rhetoric picked up ahead of next year’s presidential election. South Korea also posted a double-digit fall amid falling prices of dynamic random access memory chips (DRAM) price and concerns over the impact of power issues in China on production and supply chains. Weaker industrial metals prices also weighed on performance of net exporter markets Peru and Chile.

By contrast, net energy exporters in general outperformed, most notably Colombia, Russia, Kuwait, Saudi Arabia, Qatar and the UAE. India delivered a strong gain, with sentiment boosted in part by the recent stream of initial public offerings. The economy continued to recover while vaccinations picked up – India is now on track to deliver at least one dose to 70% of its population by November.

Global Bonds 

US and European government yields were unchanged for the quarter as an initial decline reversed in September amid a hawkish shift from central banks and continuing inflationary pressure. The UK underperformed, with a significant rise in yields on increased expectations for monetary policy tightening.

The US 10-year Treasury yield finished at 1.49%, one basis point (bps) higher. Yields fell initially, as the rapid economic recovery appeared to be moderating. However, as the market’s focus turned to rising inflation and the prospect of the withdrawal of monetary policy support, yields rose back to similar levels seen at the beginning of the quarter. The Federal Reserve (Fed) became increasingly hawkish, suggesting that asset purchase tapering could start as early as November and that it could be wound up by mid-2022, earlier than expected.

The UK 10-year yield increased from 0.72% to 1.02%, with the move occurring in September. As with the Fed, there was evidence of a marked hawkish shift among Bank of England (BoE) policymakers, with a suggestion that rate rises might be warranted before the end of the year. Recent economic indicators came out worse than expected, while year-on-year consumer price inflation rose to 3.2% in August, the highest since 2012.

In Europe, the German 10-year yield was one basis point (bps) lower at -0.19%. Italy’s 10-year yield finished 4bps higher at 0.86%. Economic activity continued at a robust pace, the region benefiting from the release of pent-up demand, having come out of lockdowns relatively late. Eurozone inflation hit a decade high of 3.4% year-on-year in August.

Among corporate bonds, high yield made positive returns, while investment grade credit was little changed. European investment grade outperformed government bonds, while the US market was in line with Treasuries. 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 government bond yields rose, particularly in September, though EM corporate bonds made a small positive return. Emerging market currencies broadly fell against the US dollar.

Over the quarter, convertible bonds could not benefit from the early tailwind provided by positive equity markets but provided some protection in September as equities declined. The Refinitiv Global Focus index, which measures balanced convertible bonds, shed -2.1% for the quarter. The valuation of convertibles cheapened slightly as a result of strong primary market activity. More than $25 billion of new convertible bonds were launched in the quarter.


The S&P GSCI Index recorded a positive return in the third quarter, driven by sharply higher energy prices caused by increased demand in the wholesale gas market. Energy was the best-performing component in the quarter, with all subsectors achieving a positive result. The price of natural gas was significantly higher in the quarter, closely followed by gains in the prices of gas oil and heating oil. Unleaded gasoline also gained strongly on stronger demand as consumers started to return to normal consumption patterns after the Covid-19 crisis.

The industrial metals component was modestly higher, with a sharp rise in the price of aluminium offsetting price declines for lead, copper and nickel. The price of zinc was almost unchanged. The precious metals component also declined, with the price of silver sharply lower. The price of gold was also lower, but the decline was more modest.

The livestock component also declined. The agriculture component reported a small decline in the quarter, with sharp declines in the prices of corn and soybeans offsetting higher prices for cotton, cocoa, Kansas wheat, coffee and sugar.

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 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 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 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.


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, 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.

Quarterly Markets Review – Q2: June 2020

A look back at markets in Q2 when shares rebounded as economies started to re-open, while governments and central banks continued to provide support.

  • The easing of Covid-19 lockdowns and early signs of economic recovery saw risk appetite return rapidly in Q2, supporting equity and credit markets.
  • US equities rebounded in Q2 and outperformed other major equity markets. Improving jobs and retail sales data provided cause for optimism.
  • Eurozone shares posted strong gains in Q2 as lockdown restrictions were eased. Another source of support was news of EU plans for post-Covid-19 recovery with the European Commission proposing a €750 billion fund.
  • UK equities rose over the period. Having contained the first wave of Covid-19, national lockdown measures were eased. Meanwhile, economic indicators suggested the downturn had past its worst point.
  • Japanese shares gained, supported by the improved global picture. Stocks sensitive to the economic cycle tended to fare best while domestic-focused stocks underperformed.
  • Emerging market (EM) equities advanced amid global monetary and fiscal stimulus. However, there was an acceleration in the number of new daily cases of Covid-19 in some EM countries.
  • In government bonds, US and German 10-year yields saw little change in the quarter. Corporate bonds outperformed government bonds.
  • In commodities, the energy component rallied as oil-producing countries agreed temporary production cuts.

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 equities rebounded in Q2 and outperformed other major equity markets. At the beginning of the quarter, data confirmed the severe economic impact of lockdown measures. However, the subsequent easing of lockdown restrictions, ongoing loose monetary policy from the Federal Reserve (Fed) and early indications of a recovery led to widespread equity market gains. Weekly claims for unemployment insurance slowed substantially and retail sales rebounded strongly from April to May. As yet, the Federal Reserve (Fed) is “…not even thinking about thinking about raising rates”, according to Jerome Powell, chairman of the US central bank.

However, investor optimism was tempered by a subsequent rise in Covid-19 cases that has prompted some states to rethink or reversing the easing of lockdown measures. US-wide, the trend of new cases accelerated rapidly into the end of June. The states of Texas, Florida, California and Arizona saw notable increases in cases and hospitalisations.

The improvement in retail sales was supportive of consumer discretionary stocks, which outperformed, along with information technology, which has been consistently resilient through the crisis. Energy and materials also made strong gains. More defensive areas such as utilities and consumer staples lagged behind.


Eurozone equities posted strong gains in Q2 as countries began to lift lockdown restrictions. The Baltic countries and Austria were among the first to loosen their lockdowns in April due to their relative success in containing Covid-19. Worse affected countries such as Spain, France and Italy waited until later in the quarter before relaxing measures.

Another source of support for shares was news of the EU’s plans for post-Covid-19 recovery. European Commission president Ursula von der Leyen called for the power to borrow €750 billion for a recovery fund to support the worst affected EU regions. This would be in addition to a €540 billion rescue package agreed in April. The European Central Bank also offered support, expanding its pandemic emergency purchase programme to €1.35 trillion.

Data showed the eurozone economy shrank by 3.6% in the first quarter, compared to the final three months of 2019, as lockdown measures were widely introduced in March. However, surveys of economic activity showed marked improvement through the spring. The flash eurozone composite purchasing managers’ index (PMI) for June rose to 47.5, compared to 31.9 in May and 13.6 in April. (50 is the level that separates expansion from contraction. The PMI surveys are based on responses from companies in the manufacturing and services sectors).

All sectors posted a positive return in the quarter. Information technology saw some of the strongest gains along with industrials, materials and financials, as news of lockdowns lifting buoyed economically-sensitive sectors. The energy sector was the main underperformer.


UK equities rose over the period. Having contained the first wave of Covid-19, national lockdown measures were eased. Meanwhile, economic indicators suggested the downturn had passed its worst point. A number of economically sensitive areas of the market outperformed amid a general improvement in investor sentiment, largely driven by global considerations. The mining sector, for instance, performed very well, in part due to the ongoing recovery in Chinese economic activity and new stimulus measures.

The latest monthly estimates revealed that the UK economy contracted by 20.4% in April (the first full month of the UK national lockdown). However, Google mobility data suggests that the fall in travel to work also bottomed out that month. This supports the view that GDP could have returned to positive growth in May.

The government began to ease lockdown measures with people encouraged to return to work where necessary and a phased reopening of schools and various industry sectors confirmed. This occurred as the cost of the government programmes announced in Q1 to cushion the blow from unemployment and the loss of income as a result of the lockdowns became apparent in borrowing figures released in Q2.

The government confirmed a phased end to the furlough scheme and the Bank of England (BoE) expanded its quantitative easing programme. The BoE’s governor told parliamentarians that negative rates were under “active review” while the Debt Management Office reported it had sold negative yielding gilts for the first time. However, negative base rates are seen as unlikely. Brexit returned to the agenda as the deadline passed for an extension of the transition period, which expires on 31 December 2020.


After weakness in early April, the Japanese equity market recovered to record a total return of 11.3%. Although there was some short term currency volatility in June, the yen remained in a fairly stable range throughout the three months.

As the quarter unfolded, investors reacted positively to signs of a peak in virus cases globally, rather than specific news on Japan itself. As a result, economically sensitive and global stocks, together with pharmaceuticals, tended to lead the market recovery. Domestic-focused stocks such as transportation, insurance and utilities typically lagged behind the overall market rise. Airlines continued to weaken as concerns mounted over their inability to restart profitable services in the medium term, even when lockdowns began to ease. Smaller companies were very weak relative to the overall market in first few days of April but gradually recouped this decline and actually outperformed large caps over the quarter as a whole.

Compared to other developed countries, Japan continued to experience a rather different trajectory of recorded virus cases and mortality over the last three months. A state of emergency was declared by the central government across seven prefectures, including Tokyo, on 7 April, which was later extended nationwide. Even so, the practical restrictions on social and business activities remained far less restrictive than those seen in Europe. Prime Minister Abe was then able to announce a staged lifting of the state of emergency, starting from 14 May for some prefectures and culminating on 25 May for Tokyo.

The Japanese government also continued to step up its fiscal response to the crisis and drew up a second supplementary budget, as expected, in May. Following the increase in its pace of exchange-traded fund (ETF) purchases from March onwards, the Bank of Japan also announced additional monetary policy initiatives.

Asia (ex Japan)

Asia ex Japan equities recorded a strong return in Q2 – albeit advancing by slightly less than the MSCI All-Country World Index. Markets were buoyed by fresh stimulus from major central banks, ongoing normalisation within the region and the reopening of economies across the world, which began to exit Covid-19 lockdowns.

The export-oriented markets of Indonesia, Thailand and Taiwan outperformed the regional index on hopes of a recovery in global demand in the second half of 2020. Indonesia also benefited from strong currency appreciation. India and Korea both outperformed too. India’s central bank provided additional support in April which was followed by the announcement of a major fiscal stimulus package in May. The country also benefited from lower oil prices. Meanwhile, a better-than-expected earnings season boosted the Korean market, as did the announcement of additional economic support from the government. 

By contrast, Hong Kong SAR underperformed amid increased geopolitical tensions. China announced the imposition of a national security law in Hong Kong SAR, which came into effect on 30 June. Singapore and, to a lesser extent, Malaysia underperformed. China slightly underperformed, after strong outperformance in Q1. During the second quarter, economic activity continued to recover, with manufacturing PMI improved to 51.2 in June, though exports fell by 3.3% year-on-year in May after expanding in April. Meanwhile the government announced further fiscal support at the National People’s Congress in May. However, geopolitical concerns increased as the US-China confrontation expanded beyond trade and technology issues. In terms of sectors, healthcare, materials and energy were among the top performers, while utilities, financials and industrials advanced the least.

Emerging markets

Emerging market (EM) equities rallied, recording their strongest quarterly return in over a decade, with US dollar weakness amplifying returns. This was despite an acceleration in the number of new daily cases of Covid-19 in some EM countries. The MSCI Emerging Markets Index increased in value but slightly underperformed the MSCI World Index.

EM countries with high foreign financing needs outperformed, notably Argentina, which was the best-performing market in the MSCI EM index, as well as South Africa and Indonesia. In South Africa, after initially announcing a strict lockdown, the government started to reopen the economy, and economic activity started to recover, as evidenced by June manufacturing PMI which showed marked improvement. The exporter markets of Thailand and Taiwan outperformed on hopes of a recovery in global demand in the second half of 2020. Brazil recorded a strong gain despite a headwind from currency weakness

By contrast, Egypt and Qatar were the weakest index markets, though both still posted solid gains. Mexico underperformed as the government remained reluctant to provide more meaningful fiscal support. China also underperformed, having outperformed by a wide margin in Q1. Economic activity continued to normalise and additional stimulus was announced at the National People’s Congress in May. However, US-China tensions increased, extending beyond trade and technology issues. China proposed a new security law for Hong Kong which was implemented at the end of June. In addition, tensions with India increased, amid skirmishes on the disputed Himalayan border.

Global bonds

The quarter saw a forceful rebound in investor sentiment and riskier assets as the rate of new Covid-19 cases started to slow and countries began easing lockdown measures. Economic data confirmed a sharp contraction in activity, but several measures significantly exceeded very low expectations. Central banks continued to strongly affirm their intention to support economies and markets through asset purchases and other measures.

Broadly, government bond yields saw a degree of divergence over the quarter. The US and Germany’s 10-year yields were little changed, but those more sensitive to risk sentiment declined (meaning prices rose). The US 10-year yield remained in a narrow range, and finished one basis point lower. It sold off in early June following a stronger-than-expected US labour market data release, though the move reversed later in the month.

In Europe, the more noteworthy development was a decline in the Italian 10-year yield of over 22 basis points (bps) to 1.26%. Italian bonds benefited from hopes of moves toward more coordinated support measures in the eurozone.

With Brexit back in focus, the UK 10-year bond yield was 18bps lower at 0.17%. The UK two-year yield dropped below zero for the first time, finishing at -0.08%, as the central bank discussed the possibility of negative interest rates.

Corporate bonds performed strongly, outpacing government bonds, as they benefited from stronger risk appetite. High yield performed particularly well with total returns (local currency) of 11%, led by the European market. Investment grade returned 7.9%. The US energy sector performed well across investment grade and high yield. Investment grade bonds are the highest quality bonds as determined by a credit ratings agency; high yield bonds are more speculative, with a credit rating below investment grade.

Emerging market (EM) bonds also rebounded to produce strong gains. Hard currency government, quasi-sovereign and corporate bonds returned over 11%. Local currency bonds were up nearly 10%. EM currency performance was mixed, broadly lagging behind other risk assets, as concerns over Covid-19 remained heightened, notably in Brazil.

Global stock markets had a strong second quarter with the MSCI World index gaining 19.4%. Convertible bonds, as measured by the Thomson Reuters Global Focus index, showed a remarkable participation in the gains, with the index finishing the second quarter up 15%. The convertible primary market showed activity not recorded since 2007 and the record volume of new issues kept valuations low.


The S&P GSCI (Commodities) Index rallied strongly in Q2, recovering some of the ground lost in Q1 and aided by US dollar weakness. The energy component posted a sharp gain, as OPEC (the Organisation of Petroleum-Exporting Countries) and Russia agreed to make temporary production cuts. This masked volatility in April caused by oversupply and storage concerns.

The industrial metals component recorded a positive return, led by iron ore and copper. Precious metals advanced too, with silver the standout performer. The agriculture sector posted a negative return, with coffee and wheat prices notably weak.  

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 – March 2020

A look back at markets in Q1 2020 when the spread of coronavirus across the world saw stock markets fall sharply.

  • The spread of Covid-19 profoundly affected global markets in the first quarter. Equities suffered steep declines and government bond yields fell (prices rose) as investors favoured their perceived safety.
  • Shares fell across developed markets as coronavirus spread and countries went into lockdown to try to contain the outbreak. Governments and central banks announced measures to support businesses and households and reduce borrowing costs.
  • Emerging market (EM) equities also tumbled, slightly underperforming developed markets as a strong US dollar proved to be an additional headwind.
  • Government bonds saw yields fall (meaning prices rose) as investors sought out assets perceived to be lower risk. Corporate bonds underperformed government bonds.
  • In commodities, oil prices plunged as the spread of coronavirus weakened the outlook for demand, at the same time as there was a breakdown of an agreement between oil producers to constrain supply.

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 equities declined significantly over the quarter as the coronavirus outbreak spread. Confirmed US cases of Covid-19 rose from 150 to over 100,000 between 4 March and 27 March, and the economic impact grew clearer. Jobless claims rocketed by over three million in the last week of March and economic indicators suggest more pain will follow.

The Federal Reserve (Fed) cut interest rates twice in March for the first time since the global financial crisis and announced unlimited quantitative easing (buying bonds). US interest rates now stand at 0-0.25%. The US Senate also passed a $2 trillion stimulus package. The proposed package includes $250 billion worth of direct payments to households, $500 billion for loans to distressed companies and $350 billion for small business loans.

All sectors saw significant declines. Energy stocks were hit hard, with the addition of the oil price war weighing heavily. Financials and industrials also fell sharply. The information technology and healthcare sectors held up better, albeit with what would be considered steep falls in any other quarter.


Eurozone equities experienced a sharp fall in Q1 due to the spread of coronavirus. Italy and Spain became some of the most severely affected countries. Nations across Europe took steps to restrict the movement of people and shut down parts of the economy in an effort to slow the spread of the virus. Growth in Europe was already fragile – the eurozone economy grew by just 0.1% in Q4 2019, with Germany registering zero growth. A sharp economic downturn is expected.

Forward-looking indicators showed how economic activity has collapsed. The flash Markit composite purchasing managers’ index (PMI) for March fell to a record low of 31.4, compared to 51.6 in February. The PMI survey covers companies in both the services and manufacturing sectors, and an index reading below 50 indicates economic contraction.

All sectors fell over the quarter. Defensive areas of the market such as healthcare and utilities held up best. Financials and industrials were among the worst hit sectors. Regulators have pushed for banks across Europe to suspend dividends and share buybacks until at least the autumn. This would help increase their capacity to manage rising non-performing loans as borrowers struggle to make repayments.

The European Central Bank announced the Pandemic Emergency Purchase Programme (PEPP) – a €750 billion scheme. The PEPP will fund the purchase of government and corporate bonds until the end of the Covid-19 crisis. Governments across Europe also announced spending packages to help businesses and households bridge the gap between the loss of income during this period of disruption and the expenditures required to survive.


UK equities tumbled as efforts to deal with the coronavirus pandemic hit economic activity indiscriminately and simultaneously. Prior to these events, domestic politics and Brexit had dominated the narrative around UK assets and the economy for much of the quarter. At the height of the market sell-off, all assets (including government bonds) fell amid fears around the stability of the financial system.

Against this backdrop, sterling hit multi-decade lows versus the US dollar as investors sought safety in cash, particularly US dollars. In line with other central banks, the Bank of England materially reduced interest rates, cutting by 65 basis points to 0.10%. This response was co-ordinated with the UK government, which unveiled an unprecedented series of fiscal support measures, in line with initiatives by many other developed nations.

Oil and gas was the worst performing industry groups over the period, selling off on concerns about falling demand in the wake of the virus, as well as the failure of negotiations between OPEC (the Organisation of the Petroleum-Exporting Countries) and Russia to control the global supply of oil. The consumer services sector also performed very poorly as investors sought to calibrate the effect of a sharp fall in consumer demand as the UK and other governments introduced lockdown measures.


After a relatively stable start to the year, the Japanese market fell steeply in late February and early March before recovering some ground to end the quarter with a total return of -17.5%. Even allowing for the exceptional environment, the yen was extraordinarily volatile through this period but, if anything, has probably remained slightly weaker than one might otherwise expect.

Market dynamics were fairly chaotic, especially during the mid-March rebound, with some days marked by a strong recovery of those stocks and sectors seen as most heavily oversold, while other days seem to represent a more genuine willingness by investors to take on risk in larger cap cyclical sectors (i.e. those that are most sensitive to the economic cycle). Smaller companies have been significantly weaker than the main indices across the quarter, despite some relative recovery in the second half of March. Style influences were also prevalent, as value stocks underperformed across the quarter, with particular weakness in the first half of March. Value stocks are those that tend to trade at a lower price relative to their fundamentals, such as dividends, earnings and sales.

The initial estimate of Q4 GDP growth released on 17 February was much weaker than consensus expectations. Even allowing for the consumption tax increase and the major typhoon, which hit Japan in October, this was a poor data point.

In terms of the actual virus spread, Japan has so far been on a very different trajectory to most other developed nations with a slower spread and lower mortality rate. This has resulted in a slightly less stringent response from the authorities so far. From late March, however, there have been more forceful requests from both central and local governments to curtail social activities and it is possible that more severe restrictions on movements will be imposed on Tokyo in the near future.

The highest profile impact for Japan has been the postponement of the Tokyo Olympics for one year to July 2021. Although this is not particularly significant in economic terms, with maybe 0.2% of GDP shifted from this year to next, there could be political implications as the Games are now planned just before the end of Mr Abe’s term as Prime Minister in October 2021.

Asia (ex Japan)

Asia ex Japan equities declined sharply in the first quarter, as Covid-19 became a pandemic and the prospect of a global recession loomed. US dollar strength was a drag on returns. The MSCI Asia ex Japan Index decreased in value but outperformed the MSCI World Index.

ASEAN (Association of Southeast Asian Nations) markets were notably weak and all underperformed the MSCI Asia ex Japan Index. India also finished behind the index as the number of Covid-19 cases began to increase, and the government announced a national lockdown for at least three weeks. South Korea also lagged behind. Although the country’s response to the crisis appeared to be progressing, the weaker outlook for global trade and growth weighed on the market. 

China and Hong Kong were the only markets to outperform the index. China, seen as ahead of the curve as it was the first country to record cases of Covid-19, took measures to lock down the city of Wuhan. Its measures to contain the spread were deemed a success as the number of active cases of Covid-19 in mainland China appeared to peak in February, and subsequently fell sharply. Meanwhile, the spread of the virus appeared to be relatively contained in Hong Kong.

Emerging markets

Emerging market (EM) equities fell heavily in Q1, negatively impacted by the Covid-19 pandemic. The spread of the virus beyond China led to lockdowns globally and resulted in sharp falls in economic activity. A global recession is now expected this year. Against this backdrop, a stronger US dollar was a further headwind for EM. The MSCI Emerging Markets Index decreased in value and underperformed the MSCI World Index.

Brazil was the weakest market in the index, with currency weakness amplifying negative returns. The central bank cut its headline interest rate by a total of 75bps to 3.75%. It announced measures including reserve requirement reductions for banks and agreed a foreign exchange swap line with the Fed. The government also took fiscal measures to help households and businesses. Colombia was another underperformer as it was additionally impacted by the fall in crude oil prices following the failure of talks to limit oil production. Greece, South Africa and Pakistan all underperformed.

By contrast, China recorded a negative return but outperformed the MSCI Emerging Markets Index as the number of Covid-19 cases declined, and economic activity began to resume. The initial response to the virus outbreak led the authorities to effectively quarantine the city of Wuhan, and the wider province of Hubei. These measures only began to be eased at the end of the quarter. A mixture of interest rate cuts and fiscal (tax and spending) measures were also announced during the quarter.

Global bonds

Government bond yields declined over the quarter, meaning bond prices rose, as higher risk assets such as shares saw heavy declines amid rising fears over the Covid-19 pandemic. Investors favoured the perceived safety of government bonds due to the growing likelihood of a deep global recession. The moves largely occurred in late-February and March as numerous countries went into lockdown in response to the pandemic, seriously depressing economic activity. This resulted in severe declines and extreme daily swings in assets prices on a scale comparable to the crises of 2008 and 2011.

Markets saw extreme declines and volatility in March. US stock market trading was temporarily suspended on a number of occasions due to the size of daily moves and, for several days, companies were unable to issue bonds. Government bond yields and prices were volatile, first reaching extreme lows on heightened fear, but then rising, as panicked investors sold liquid assets indiscriminately in order to raise cash.

As the crisis unfolded, governments and central banks announced unprecedented support programmes for businesses, households and the financial system, helping to stabilise markets later in the month.

The US 10-year yield dropped from 1.92% to 0.63% over the quarter, while the two-year yield dropped from 1.57% to 0.23%. The German 10-year yield fell from -0.19% to -0.49%, France’s from 0.12% to 0%. The Italian 10-year yield rose from 1.41% to 1.57%. Spain’s increased from 0.47% to 0.71%. The UK 10-year yield fell from 0.82% to 0.32%.

Corporate bonds, and emerging market debt and currencies declined significantly, mainly in March, and underperformed government bonds, with moves exacerbated by a sharp tightening in liquidity. For several days, companies were unable to issue bonds although this improved later in the month. US investment grade bonds ultimately saw a record month of issuance in March, as the Federal Reserve announced it would buy corporate bonds. Investment grade bonds are the highest quality bonds, as determined by a credit ratings agency, while high yield bonds are more speculative, with a credit rating below investment grade.

High yield credit was hit hard given the heightened risk aversion. The sell-off was sharper in more vulnerable sectors related to travel and retailing, as well as in energy as the oil price plummeted.

In emerging markets, local currency bonds saw the heaviest falls. Currencies more sensitive to growth and oil prices, and also those with more liquidity, saw double-digit declines, in some cases of around 20%. 

The overall MSCI World Index lost -21.1% in Q1. Convertible bonds, as measured by the Thomson Reuters Global Focus Index, effectively protected investors from losses and finished the quarter with a loss of -8.6% in US dollar terms. In any equity market sell-off (and especially in a vicious sell-off with the speed and extent witnessed in March) the valuation of convertibles comes under pressure. Convertibles have become cheaper in all regions but the traditionally rather efficient US market has seen a sharp 4% drop in valuations.


The S&P GSCI Spot Index experienced a major fall over the quarter. US dollar strength weighed negatively, so too the energy component. Crude oil prices fell heavily as talks between OPEC and other oil producers including Russia failed to agree on extensions to production cuts. This impact was exacerbated by a weaker demand outlook for oil stemming from the impact of Covid-19. Industrial metals also fell, led by copper, as the demand outlook deteriorated. The agriculture component posted a negative return with cotton and sugar prices falling heavily. Conversely, precious metals generated a small gain, aided by an increase in gold prices.