Stock Take

Donald Trump and Joe Biden debated publicly for the final time last week, in a session that was more restrained than their first meeting. Viewers were impressed by the performance of both contenders, according to analysis company FiveThirtyEight, which also found that the final debate didn’t have much of an impact on how favourably people viewed either candidate. Americans who haven’t already voted will go to the polls in a little over a week.

Just as important for investors is the hoped-for stimulus deal that has so far failed to get off the ground. There were some reports of progress last week, but by Friday the two parties had resumed finger-pointing. However, many investors believe that the deal is likely to pass after the election regardless of who wins, given that Democrats and Republicans agree on the need for more support.

Investors should remember to focus on the long-term view. Beyond the headlines, there’s plenty of historical data showing that annual US stock market returns are generally positive during presidential election years, and that returns are broadly similar during the terms of both parties.

Meanwhile, Brexit trade talks have entered the final straight. Talks resumed in London last week, having passed the 15 October deadline set by Boris Johnson. Press reports suggest that the two sides are targeting an agreement in November.

If it seems like political events are heavily influencing markets at the moment, that’s because they are. Events such as the US election, Brexit trade talks, and the relationship between the US and China have combined with the impact of COVID-19 to cause high levels of uncertainty. This is evidenced by the fact that the third-quarter earnings season has garnered less attention than it usually would, suggests Chris Ralph, Chief Global Strategist at St. James’s Place.

“Geopolitics has had greater influence on markets over recent years than at any time during my career,” he notes.

Still, there were some interesting third-quarter results last week. On Friday, European equities edged higher after some better-than-expected results from banks like Barclays and Nordea. But elsewhere, many companies are showing the strain, especially in sectors like hospitality and travel, which have been hit hard by COVID-19.

Investors can probably expect more of this divergence as the year draws to a close in the challenging environment of the pandemic, says Mark Holman of TwentyFour Asset Management, co-managers of the St. James’s Place Strategic Income fund.

He expects that investors in corporate bonds will have the chance to add new names to their portfolios as companies turn to the market to meet their borrowing needs.

“Along with more frequent issuers, especially the banks and insurers, we would expect more names with less resilient credit stories to try to access the market, as for this latter group the market has only recently opened up. For bond investors, some of these might represent opportunities to add some pro-cyclicality to portfolios, whereas others should come with a strong health warning,” he says.

“Unlike the past six months, where nearly all new deals performed well in the secondary market, from here on that is far from guaranteed. Expect winners and losers.”

Regulators search for an answer

Finally, early last week, the United States Department of Justice (DOJ) filed an antitrust lawsuit against Google, accusing it of suppressing its competition unfairly. The company is a “monopoly gatekeeper for the internet”, say lawyers for the DOJ, who are trying to force the technology giant to change.

Given how dominant Google is in internet search and digital advertising, there’s been plenty of speculation that such a move was in the works. But what does it mean for investors who own its parent company, Alphabet?

“While these threats need to be monitored, it’s unlikely that regulators will permanently reduce Google’s competitiveness in search or digital advertising,” argues Hamish Douglass of Magellan, manager of the St. James’s Place International Equity fund, which owns Alphabet. “Alphabet’s strong presence in a wide range of products and services [such as artificial intelligence or drone delivery] give it a strong competitive advantage.”

He adds that the fact that the its core product, Google, has become a verb like ‘hoover’ or ‘photoshop’, is evidence of how widespread and essential it is.

“Alphabet’s growth rates are likely to fall over time. But any company that owns a household verb doesn’t need much to go right for it to deliver bumper returns for its investors for many years.”

Wealth Check

Could it happen? At the beginning of this month, the UK’s banks received a letter from the Bank of England, asking them how ready they would be if the base rate – currently 0.1% – moved into negative territory.

Last week, Gertjan Vlieghe, who sits on the Bank’s monetary policy committee (MPC), warned that the second wave of COVID-19 was holding back consumer spending and suppressing business investment. He said the central bank would need extra firepower to boost the economy and went on to back negative interest rates as another option to stimulate lending. All four external members of the nine-strong MPC have made comments that support negative rates.

“Negative rates should, in theory, encourage borrowing and discourage deposits and savings,” says Azad Zangana, Senior European Economist & Strategist at Schroders. “But, in practice, they can result in some bizarre outcomes – for savers and mortgage holders.”

Of course, for savers it’s a grim prospect. According to an October report by Moneyfacts, the average no-notice account rate is just 0.23%, nearly two-thirds lower than this time last year, but it could get worse. In Sweden, Switzerland and other places with negative rates in place, savers receive zero interest, but do not actually pay the banks to hold their money.

In European countries with negative interest rates, ‘reverse-charging mortgages’ are no longer unfamiliar. But rather than make monthly payments to the borrower, the lender reduces the outstanding capital. It means mortgage holders can end up paying back less than they borrowed.

How might stock markets react? “Lower interest rates could be positive for the UK stock market because they increase the value of future earnings that companies make that would eventually be paid out to shareholders,“ suggests Zangana.

“Companies’ earnings become more valuable in a low interest rate environment. When this happens, share prices tend to appreciate in value.”

In The Picture

As you go through your retirement, there is a possibility that the order and timing of your investment returns are going to be unfavourable. This is known as Sequencing Risk.

Thankfully, there are steps that can be taken to mitigate this uncertainty. Getting financial advice is key, especially as what steps you should take will depend on your personal circumstances, your attitude to risk and your retirement goals.

The Last Word

“We can’t use yesterday’s methods to regulate the future.”

– Jack Ma, owner of Chinese fintech giant Ant Group, argues for an overhaul of the international financial system ahead of the company’s expected IPO this week.

Magellan, Schroders and TwentyFour Asset Management are fund managers for St. James’s Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past resultsare indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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