Monthly Outlook - October 2020
- 15 October 2020
- 5 mins reading time
The potential for a second wave of Covid-19 is increasing, albeit with a greater understanding among medical professionals of how to treat the virus. Even so, we expect economic growth to be limited and, therefore, governments and central banks to continue their programmes of financial support.
That said, we continue to foresee a U-shaped recovery with economic growth starting to improve in the latter part of 2020.
Policy and inflation
The major central banks of the western world, including the US Federal Reserve, have indicated that they will allow inflation to rise above the annual target rate of around 2.0% temporarily, while they keep interest rates extremely low and pump new cash into the financial system.
This “loose” monetary policy is designed to support borrowing and spending which, in turn, help to bolster company profits and share prices.
In the meantime, the prices of corporate bonds have risen substantially in recent months. We held a large allocation to these as part of our short-term or tactical asset allocation (minor nuances that we use to complement our much more substantial and significant long-term asset allocation).
We now see a greater potential for short-term rises in shares of companies that have good cash flows, manageable debt levels and positive post-pandemic prospects. As part of this, we are selecting opportunities from within a diverse range of regions and company sizes. This has included adding to our holding of smaller US companies while maintaining our allocation to companies in emerging markets.
Bonds and hedging
We also continue to hold our allocation to emerging market bonds. While the upside for bond prices in general is fairly limited after they’ve risen so far already, they act as a useful diversifying tool in portfolios should there be further turbulence in asset prices.
We’re also adding to this diversification by taking positions in currencies. For example, we have increased our holdings of the more stable currencies that tend to perform better during times of market stress, although this is not guaranteed. These positions include an increased allocation to euros, Japanese yen and Swiss francs, and a reduction in the assets held in pounds sterling and non-Japanese Asian currencies.
Our general view of assets over the coming months can be summarised as follows:
Any views expressed are our in-house views as at the time of publishing.
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Forecasts of future performance are not a reliable guide to actual results. Investment markets and conditions can change rapidly and the views expressed should not be taken as statements of fact nor relied upon when making investment decisions. The value of investments and the income from them can fall as well as rise and are not guaranteed. The investor might not get back their initial investment.
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