GLOBAL EQUITIES
The virus news is not particularly encouraging and although we are avoiding a second full lockdown in the UK for the time being, the backdrop is clearly deteriorating. Businesses already on the brink are going to find things tough over the next six months and the feeling of doom regarding the approaching winter period is palpable. The UK is not alone – infection rates are increasing in Europe and although the death rate is much lower this time round (probably due to those infected being younger) the possibility that we will see exponential growth leading to a true second wave is real. The UK really feels under the cosh with a decidedly out-of-favour market and the task of negotiating Brexit compounding the significant difficulties already faced. Markets have started to reflect the dangers here and elsewhere with very modest wobbles in equities, though without the drama of March 2020. Whether we do see sustained weakness in risk assets is going to be driven by virus newsflow and how much additional stimulus we see. On that point, the US response to developments is likely to be dictated in part by political shenanigans ahead of the forthcoming Presidential election, which has an additional controversy to contend with in the form of a Supreme Court nomination following the death of one of the key serving members. In the UK, all eyes turn to the Chancellor as he weighs up the potential costs and benefits of Furlough II … probably taking a lead from slightly different structures working in Germany and France. In total, these factors look as if they will combine to make the winter a challenging one and we remain as cautious as ever in our approach to markets.
INFLATION – DEFLATION?
Deflationary forces seem to lurk everywhere, and another iteration of lockdown is likely to accentuate them. With economies teetering on the brink and demographics and technology pointing to likely falls in prices, it is a brave investor who looks at this backdrop and seriously entertains the idea of inflation becoming entrenched. Indeed, this disinflationary outlook is the consensus view and for the time being we are fretting about global growth rather than inflationary forces. Reflecting a little more and slightly longer-term view, we can see there are indeed some factors that point to an inflationary impulse, which could start to impact the global economy. The monetary and fiscal stimulus that has been unleashed since the start of the crisis is much more likely to have an effect on prices in the real-world economy than were the stimulus measures adopted during the Great Financial Crisis, which impacted asset prices more. There comes a point where we have to position portfolios to at least reflect the possibility of inflation becoming an issue – the question is whether we have reached this point. For us, the time has certainly not come yet. When we do arrive at that point, the implementation would probably vary across risk levels – as always, one size never fits all! In lower risk portfolios, we might consider replacing (in part) the Treasuries exposure with some inflation linked bonds (still in the US, given metrics and inflation breakeven rates), and for more adventurous investors the implementation of a more inflationary view may be through some commodities exposure. These are matters we are actively discussing at an asset allocation level and we are prepared to take the appropriate action when the time comes. In this fast-moving environment, we must always be vigilant and ready to change as inflection points will (almost always) arrive unannounced!
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