Monthly Outlook - September 2020
- 07 September 2020
- 5 mins reading time
The probability of a second wave of the virus remains fairly high, but there is evidence to suggest that mortality rates are likely to be lower as hospitals are now better prepared. In a similar vein, national lockdowns are also less likely as better tracing allows for more localised lockdowns.
Against this backdrop, we expect economic growth to be limited while governments and central banks are likely to maintain their policies of financial stimulation. But, in contrast to the first half of 2020, we expect to see a gradual improvement in economic data reflecting a U-shaped economic recovery. This is supported by our analysis which indicates that the current recession will lead to the beginnings of a recovery as we move into the autumn.
We continue to have a relatively large allocation to assets that would be easy to sell should we feel it appropriate to increase our holding of cash during more market turbulence. This “liquidity”, as it’s called, is provided through the corporate bonds that we hold and contributes to the reasons why we have reduced our holding of property investments recently which are illiquid.
In contrast to this cautious tactic, we have sold some of the gold that we owned after its price rose so sharply. The purpose of this was to lock-in some profits.
In terms of equity, we continue to favour stocks that have good cash-flows, manageable debt obligations and which look set to benefit from the U-shaped recovery that we anticipate.
Turning to currencies, the most interesting change over the month has been the fall in the value of the US dollar relative to other currencies. This has benefited our reduced holding of dollar-denominated bonds and increased holding of bonds in local, emerging market currencies.
We expect the US dollar’s relative value to remain lower as the Federal Reserve is committed to maintaining policies such as low interest rates, which are designed to support economic growth.
Meanwhile, recent government and central bank policy announcements in Europe have reduced the unlikely but damaging potential for severe turbulence in the prices and yields of European government bonds.
The lower value of the dollar also helps emerging markets by making repayments on their dollar-denominated debt obligations cheaper. So we are increasing our allocation to emerging market equity while, at the same time, reducing our allocation to European equities where the euro has risen in value.
Our general view of assets over the coming months can be summarised as follows:
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