Weekly market recap: fright or flight?

Fresh lockdowns and a looming presidential election spook investors.

FacebooktwitterlinkedinmailFacebooktwitterlinkedinmail   by Tertius Bonnin, 30th October 2020

Over the weekend, I was reminded of a Halloween two decades ago when I went trick or treating with my cousins. With a basket full of treats, we headed back to my aunt and uncle’s house to take stock of our impressive hauls. With gluttonous excitement, I sunk my teeth into a Ferrero Rocher. My stomach turned and my taste buds screamed. Some horrible trickster had removed the chocolates from their packaging and replaced them with raw brussels sprouts which had been dipped in chocolate.

Markets received a nasty surprise of their own last week as lockdowns were announced across Europe. Asset class returns are below; a combination of last minute re-positioning ahead of this week’s US election and a fresh wave of lockdowns across Europe appeared to unnerve investors.

Figure 1: Asset class total returns in base currency

Source: Bloomberg, EQ Investors

After a nasty fright caused by Europe’s three largest economies announcing fresh lockdowns, the question on investors mind will be whether these new measures will cause capital flight and/or a fresh market sell-off. The decisions from Berlin, London and Paris come as European Covid-19 case numbers have continued to surge in recent weeks and are now approaching the per capita levels of both Sweden and the US where the governments have faced wide-scale criticism for their handling of the pandemic. The charts below highlight the scale of this spike since we talked about European case levels just three weeks ago along with the likelihood for a fresh wave of lockdowns.

Figure 2: European case numbers have continued to explode in Europe… Figure 3: … approaching the per-capita levels of both the US and Sweden, two countries whose governments have faced wide-scale criticism for their handling of the pandemic
Source: Bloomberg, World Bank, John Hopkins University, World Health Organisation, EQ Investors
E5 represents the largest five European states: Germany, United Kingdom, France, Italy and Spain. Active Covid-19 cases calculated as cumulative total cases less cumulative recovered or discharged from hospital less cumulative deat   hs. Population based on 2019 estimates.

Source: Bloomberg, World Bank, John Hopkins University, World Health Organisation, EQ Investors

Fears around the fresh set of lockdowns announced last week were not just confined to developed equity markets. The effects of the sell-off were also felt in commodity markets with the oil price falling more than 10% as expectation of future demand fell. This marks the latest blow for the Global Energy sector which has failed to recover from the double blow of the first Covid-19 lockdown and the oil price war between Russia and Saudi Arabia earlier this year. However, we must be careful not to write off all Energy related equities due to last week’s announcements. The chart below illustrates how Global Clean Energy – composed of a basket of stocks that are benefiting multiple governments’ commitments to a net zero emissions target – has benefited in the year-to-date despite waning short-term demand.

Figure 4: While traditional energy has suffered from a fall in short-term expected demand, those stocks exposed to the long-term secular tailwinds driving the energy transition story have flown year-to-date
Source: Bloomberg

STAT OF THE WEEK: 7 – the number of nuclear power stations out of the 8 operating in the UK due to be taken out of service by 2030 representing a third of the UK’s zero-carbon power (Nuclear Industry Association).

DATA CORRECT AS AT: 30/10/2020

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    Tertius Bonnin

    Tertius is an Investment Analyst on our research team. He focuses on investment ideas within US, global and thematic equities, and sits on our fund selection committee.

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