A delicate balancing act

Markets paused for breath in September, taking some steam out of the ‘risk-on’ rally we’ve witnessed over the past few months.

While investors remain optimistic about vaccine progress, the rising number of COVID-19 cases in Europe, and a lack of clarity on further fiscal stimulus in the US, dampened sentiment.

During the month, the MSCI AC World Index gave back half of last month’s gains, finishing down more than 3% in US dollar terms – the worst month for global equities since the March lows.

While equity markets across all major regions logged negative returns for the month, the tech-heavy NASDAQ indices, S&P 500 Index and Chinese A shares were among the weakest performers in September. However, they remain some of the strongest gainers year to date.

With weakening economic data, an uptick in virus cases and a Brexit stalemate to contend with, UK and Eurozone equities also underperformed, and remain among the weakest equity markets year to date.

Japan bucked the trend, extending its August gains, with the Nikkei and TOPIX nudging into positive territory, as newly-elected Prime Minister Yoshihide Suga held his first meeting with the Bank of Japan governor (Haruhiko Kuroda) since taking over from Prime Minister Shinzo Abe.

Elsewhere, US 10-year treasuries provided little protection from the equity market drawdown. German 10-year bunds and global high yield bonds lost ground in September, while the US dollar marginally strengthened versus a basket of currencies – including the euro, sterling and the yen.

In commodities, Brent crude tumbled almost 10% in September to around $40 per barrel, leaving it down nearly 40% year to date.

Sector returns in US dollar terms were negative across the board, with energy and financials taking the biggest hit during the month, along with telecoms and technology.

Tech hardware stocks pulled down returns in the technology sector, while good performance among semiconductor names helped to curb the monthly sector losses. More resilient sectors in September included industrials, materials and utilities.

While there is confidence that an effective COVID-19 vaccine is in the pipeline, the timeframe for the production and distribution of any potential vaccine remains difficult to predict.

With confirmed daily cases on the rise again in the UK and Europe, governments are having to grapple with the threat of a second wave as northern hemisphere nations head into winter.

Countries have avoided further national lockdowns and opted for local lockdowns in areas where cases have spiked, while reinforcing the need for face masks and ongoing social distancing measures to limit transmission.

However, authorities will be faced with some daunting challenges if rising case numbers, again, threaten to overwhelm hospitals and healthcare facilities, at a time of year that traditionally sees high demand on these services.

It comes at a tough time, for the UK in particular, after experiencing the largest fall in GDP growth on record in the second quarter of 2020, and the worst contraction among developed nations.

Quarterly GDP numbers show the economic toll the pandemic response is taking on countries around the world. India has been one of the hardest hit nations and is now the epicentre of the virus, while China’s economic recovery continues to strengthen, boosted by growth in domestic demand and rising exports.

For European countries, necessary measures taken to protect individuals and save lives have left economies struggling to get back on their feet, with some of the hardest-hit industries including hospitality, airlines, tourism and retailers facing permanent disruption to their businesses. How to strike a comfortable balance between countries’ healthcare needs and their future economic well-being, is the question that will continue to preoccupy healthcare professionals, politicians, economists, central bankers, companies and citizens – at least for the foreseeable future.

In lieu of a readily available vaccine for the remainder of 2020, and likely into next year, if we are to get our economies up and running again – and achieve sustainable growth in the future  – we may need to find more creative ways of operating alongside the lingering threat of COVID-19.

In looking for solutions to our collective problem, perhaps a more collaborative approach from governments, companies and individuals alike might better serve our combined needs at a challenging time globally.