Market Analysis Sep 2020

In Q3, US equities posted gains, although September brought some decline in risk appetites. The US economy continued its recovery, and the Federal Reserve maintained a supportive stance. With average inflation targeting (AIT) in play, the Fed indicated a willingness to tolerate temporary inflation overshoots. The latest dot plot projected interest rates to remain near zero through 2023. However, uncertainties emerged regarding a smooth transition of power after the potential reelection loss of President Trump. Additionally, European Covid-19 resurgences and fiscal stimulus concerns weighed on sentiment.

The US unemployment rate dropped to 8.4% in August, beating expectations. While economic indicators showed improvement, the pace slowed, indicating a manufacturing and consumption slowdown. Despite this, spending in food and beverage stores remained strong. Consumer discretionary stocks, as well as distribution companies and the industrials sector, performed well. Airlines struggled due to low passenger numbers, while energy companies faced weak fuel demand.

Eurozone equities saw little change in Q3, reflecting concerns about a Covid-19 resurgence. Sectors like energy and finance faced declines, but materials and consumer discretionary sectors performed better, with automotive and luxury goods stocks leading the way.

The EU approved a €750 billion fund to support pandemic recovery, but concerns grew as Covid-19 infections resurged, prompting localized restrictions. Despite this, the EU's recovery plan supported jobs by extending furlough schemes. The flash PMI dropped to 50.1, signaling stalled business activity. Additionally, annual inflation turned negative at -0.2% in August.

UK equities continued to underperform due to exposure to struggling oil and financial sectors, as well as Brexit and Covid-19 concerns. While localized restrictions were reinstated, the UK economy showed signs of recovery. Corporate confidence grew during the Q2 reporting season, with companies offering financial guidance and resuming dividends. September brought poor performance for mid-cap and UK-focused equities due to renewed restrictions. Internationally exposed large caps were impacted by the strong pound against a weak dollar.

Japanese equities trended upward, with the Topix Index gaining 5.2%, despite the yen's strength against the US dollar. Small cap stocks performed well in September, offsetting Q1 underperformance. The quarter's key event was Shinzo Abe's resignation, succeeded by Yoshihide Suga. Industrial production rebounded, and earnings exceeded expectations.

In Asia ex Japan, Taiwan excelled due to the IT sector. India, Korea, and China outperformed, but US-China tensions escalated. Thailand and Indonesia faced negative returns due to Covid-19 and tourism issues.

Positive sentiment prevailed in Q3, supported by policy measures, economic reopening, and vaccine hopes. The Fed's inflation targeting shift was well-received, and European government bonds performed well after the EU's recovery fund announcement. Corporate bonds benefited from low yields and sector recovery. Emerging market bonds and currencies had mixed returns, with hard currency bonds performing positively. Convertible bonds gained 5.5% in USD terms, growing pricier in the US due to high demand.