Weekly market recap: Covid chills capital markets

UK returns tumble amid fears of a second UK lockdown.

FacebooktwitterlinkedinmailFacebooktwitterlinkedinmail   by Tertius Bonnin, 25th September 2020

Five African grey parrots that were adopted by Lincolnshire Wildlife Park have been removed from the park following an incident with some of the guests. The group of parrots managed to teach each other a string of profanities which amused the park staff at first but caused an issue when the birds begun swearing at customers.

Traders may have been caught swearing last week as equity markets outside of the US took a tumble. Asset class returns are below; returns for UK investors were significantly worse in GBP than in local currency terms as a new spike in Covid cases raised fears of a new UK lockdown.

Figure 1: Asset class total returns, local currency

Source: Bloomberg, EQ Investors

Figure 2: Asset class total returns, GBP currency

Source: Bloomberg, EQ Investors

European equity markets took a tumble last week as governments began to announce new restrictions in response to rising cases of Covid-19. While in Western Europe cases have surged past the March highs, new cases in the US are yet to accelerate to the same extent. However, critics of government policy remain sceptical of renewed social and economic restrictions as increases in cases have not been reflected by increases in mortality rates. Some commentators suggest that the reason for the significant rise in cases with no corresponding rise in deaths is down to the sheer volume of testing now in place, as a larger proportion of asymptomatic carriers are now being picked up relative to March and April.

Figure 3: Cases have begun to resurge in Europe with the number of weekly cases now surpassing the peak back in the spring… Figure 4: …meanwhile in the US, case numbers remain a way of their peak but appear to be rising

The E4 group consists of Western Europe’s four largest economies; Germany, UK, France and Italy.
Source: Bloomberg Source: Bloomberg

 

When we break down each region’s equity market by industry to analyse the sell-off we make an interesting observation that while regional index returns varied, the underlying industries behaved very similarly. We have touched on this phenomenon before, noting that a key differentiator which creates dispersion between the US and Europe is the weighting to particular industries. As such, investors should not be surprised if there is divergence between the two regions as the US has a lot of high quality technology exposure (such as software) and Europe has a large banking sector which remains economically sensitive.

Figure 5: While industries across the regions broadly moved in line (though with a few notable exceptions), the key driver of diverging performance was down to industry weightings in the US and European equity indices
Source: Bloomberg

 

Among the few sectors providing US equities with some relative buoyancy last week were Consumer Discretionary and Information Technology, two sectors dominated by large cap FAAMG names which in recent months have grown to represent a quarter of the US index. We can be sure that these 5 stocks, Facebook, Amazon, Apple, Microsoft and Google (Alphabet) will continue to have a large impact on market returns going forward.

STAT OF THE WEEK: 50% – the EU’s target for reducing carbon dioxide emissions from cars by 2030 which has been revised from a previous target of 37.5% (European Commission).

DATA CORRECT AS AT: 18/09/2020

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Tertius Bonnin

Tertius joined EQ in 2016 and is responsible for covering investment ideas within US, Global and Thematic equities. He sits on the fund selection committee and also supports the portfolio managers across a range of other responsibilities.

He passed Level I of the CFA exam in 2018, holds the Investment Management Certificate and has a BA in Business with Finance. He enjoys a variety of sports including skiing, cycling and running – and when not in the office he experiments with Asian cuisine.

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