Weekly multi-asset desk views

Weekly Review: 23 October 2020

Weekly Mag updates

Summary

  • COVID-19 cases continue to rise at worrying levels in Europe, which is filtering through to October PMIs
  • The headline EPS growth rate for the Q3 US earnings season is now at -18%, 4% ahead of expectations
  • Still no additional fiscal stimulus from the US, but news flow remains upbeat
  • Outlook: the final full week of the US presidential campaigns, whilst the European Central Bank delivers their latest monetary decision
  • The portfolio returned -0.42% this week, taking the year-to-date returns to -4.64%

Strategy review

The portfolio returned -0.42% this week, taking the year-to-date returns to -4.64%. Our fixed income exposures detracted from returns as government bond yields moved higher over the week. Our infrastructure holdings were a positive, whilst equity and total return strategies were broadly flat.

Figure 1: Performance against benchmark

Figure 1: Performance against benchmark

Source: Insight. Gross returns. 1Data as at 23 October 2020. Insight Broad Opportunities Fund (share class S GBP, inception 29 February 2012. 2 Data as at 30 September 2020. Insight broad opportunities strategy (inception 31 Dec 2004). The long-term track record of the Insight broad opportunities strategy has a base currency of USD. This performance has been adjusted by interest rate differentials to derive a GBP proxy. No currency adjustments have been made to the underlying investments. 

Market and economic review

Any further fiscal stimulus from the US remains on hold, however news remained upbeat this week as House Speaker Nancy Pelosi said that she and Secretary Mnuchin are “just about there” in terms of agreeing on a deal. There remain a few key sticking points in the amount of aid to both state and local governments, funding for schools, and the liability shield for employers. On top of those points, it is by no means certain that an agreed deal will pass through a Republican-controlled Senate, which adds importance to the results of the upcoming elections. On that, the final US presidential debate took place on Thursday, with early analysis suggesting there was no clear winner. This is an ideal outcome for Joe Biden who went into the debate averaging high single digits above President Trump in the polls. FiveThirtyEight and RealClearPolitics averages currently show a Biden lead of 9.9pts and 7.9pts respectively.

Whilst on politics, the UK government restarted negotiations with the EU over a transitional Brexit trade agreement. After a period in which apparently no progress had been made in talks between the two sides, hopes remain that a compromise will be reached. However, if a deal is finally agreed, it is now likely to be much less wide-ranging than initially expected, given the limited time left to negotiate. Sterling appreciated over the week, however Brexit negotiations were likely not the only catalyst with Dave Ramsden, the Bank of England’s deputy governor, stating that now was not the right time for negative interest rates. 

The pandemic remains a focal point with the number of new cases continuing to escalate, particularly in Europe. In an attempt to combat the spread, it comes as no surprise that governments continue to impose stricter lockdown measures. For example, in the UK, regions are being categorised under different tiers based on caseload numbers, with an array of restrictions being imposed. Another mitigant comes in the form of a curfew. France has reported an extension of the curfew they recently imposed, and Chicago is following suit after their daily case record was exceeded this week.

The issue governments face is, whilst lockdowns may help to limit the spread of the virus, they also constrain economic activity, which has started to filter into the PMIs released at the end of the week. Thus far for October, the common theme has been an improvement in manufacturing while services have been slightly softer. In Europe, the German manufacturing print came in at 58, an increase from 56.4 last month, with demand for capital goods strong, underlining the rebound in capital expenditure and the strength of the auto sector. With services falling to 49.4 (from 50.6), the composite print was broadly in line with last month, however the underlying composition has clearly diverged. Looking more broadly at Europe, manufacturing printed at 54.4 (up from 53.7) and services printed at 46.2 (down from 48), contributing to a composite of 49.4 (down from 50.4 last month). The UK composite was slightly stronger, coming in at 52.9, however this is a material drop from the 56.1 in September. Manufacturing softened despite new orders holding up, whilst services dropped sharply, with the outlook for the services sector rather bleak, given the increase in recent lockdown measures. 

In other data releases, the weekly initial US jobless claims number came in at 787k for the week ending 17 October. This is the lowest number the series has seen since the beginning of the pandemic, however it’s worth noting that this is still in nose-bleed territory compared to historic data. China’s third-quarter GDP expanded 4.9% year-on-year. This was less than expected but compared well with a rate of 3.2% in the second quarter as economic activity continued to recover from the COVID-19 shock. After a state-backed industrial recovery, the expansion is now extending to consumption: in September, retail sales rose 3.3% year-on-year, their second consecutive monthly increase, as industrial production grew 6.9% year-on-year (the most since December 2019).

Finishing with an update on earnings, and the US season kicked into gear this week with 89 firms reporting, representing 15% of S&P 500 market cap. The headline EPS growth rate for Q3 is now at -18%, which is 4% ahead of expectations. Thus far, 90% of companies reported have beaten expectations – this is above historical averages. That said, price reaction has been negatively skewed, with the average price reaction to misses the worst we’ve seen in 5 years. This week there weren’t too many notable names reporting, although comments from the Coca-Cola CEO on regional divergence matched what we are seeing in our high frequency indicators. Namely, that Chinese activity has now got back to pre-COVID-19 levels, in big contrast to western economies and particularly Europe where activity is running significantly below. Earnings season in Europe is also in full swing, with price reaction more mixed, particularly for European banks where both UBS (+5%) & Barclays (+7%) rallied strongly after posting strong results.

Outlook

COVID-19 cases and associated lockdowns will likely dominate market proceedings next week, especially as the second wave remains a concern. Away from the pandemic, next week is the last full week of the US election campaign, and it will be interesting to see whether Joe Biden manages to maintain his advantage in the polling averages.

It is a relatively quiet week on the macro data front, but we do hear from central banks with both the European Central Bank (ECB) and the Bank of Japan (BoJ) making their latest monetary policy decisions. On the former, the market expects policy to remain unchanged, however it will be interesting to see the updated macroeconomic projections, along with estimates of for growth and inflation.

Finally, it is another big week for earnings with another 184 companies from the S&P 500 reporting, and 94 companies from the STOXX 600.

 

Important information

5-year performance record to 30 September 2020

  Calendar year returns   12-month rolling returns  
  2019 2018 2017 2016 2015   2019-2020  2018-2019  2017-2018 2016-2017 2015-2016 Currency
Insight's broad opportunities strategy (pooled) (GBP) 13.13 -4.99 10.13 5.05 -1.19   -3.60 5.80 2.18 6.82 5.45 GBP
3-month GBP LIBID 0.68 0.60 0.23 0.38 0.45   0.36 0.70 0.50 0.21 0.42  


Please refer to the following risk disclosures. 
Returns are shown gross of fees. Returns are shown for the Insight Broad Opportunities Fund (share class S GBP, inception 29 February 2012) and the Insight Broad Opportunities Strategy (inception 31 Dec 2004).

RISK DISCLOSURES

Past performance is not indicative of future results. Investment in any strategy involves a risk of loss which may partly be due to exchange rate fluctuations.

The performance results shown, whether net or gross of investment management fees, reflect the reinvestment of dividends and/or income and other earnings. Any gross of fees performance does not include fees and charges and these can have a material detrimental effect on the performance of an investment.

Any target performance aims are not a guarantee, may not be achieved and a capital loss may occur. Strategies which have a higher performance aim generally take more risk to achieve this and so have a greater potential for the returns to be significantly different than expected. Portfolio holdings are subject to change, for information only and are not investment recommendations.

ASSOCIATED INVESTMENT RISKS

Multi-asset

  • Derivatives may be used to generate returns as well as to reduce costs and/or the overall risk of the portfolio. Using derivatives can involve a higher level of risk. A small movement in the price of an underlying investment may result in a disproportionately large movement in the price of the derivative investment.
  • Investments in bonds are affected by interest rates and inflation trends which may affect the value of the portfolio.
  • The investment manager may invest in instruments which can be difficult to sell when markets are stressed.
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