Markets in a Nutshell - September 2020

The global equity rally continued, recouping all losses suffered earlier this year. The US S&P 500 index surged to an all-time high, capping its best August in 36 years. A resurgent China led emerging markets higher despite the deteriorating relationship with the US.

Global developed market sovereign bond yields rose, reflecting improved economic activity and the risk of higher future inflation following a shift in the Fed’s rate setting policy. Fed Chair Jerome Powell said the central bank would tolerate inflation above the previous 2% bogey, adopting a new “average inflation targeting” policy. Interest rates are likely to stay lower for longer. Corporate bond yields also recouped the losses suffered in March and April. In our view corporate bonds are now materially mispricing the risk of company defaults in the years ahead.  The US dollar continued to decline against the euro (+1.1%) and British pound (+2.0%) on the growing Fed dovishness.

Precious metals platinum (+2.1%), palladium (+6.2%) and silver (+13.6%) built on already sizable gains this year (gold was flat) while industrial commodities including copper (+6.4%) and iron ore (+12.4%) rose, driven by US dollar weakness and the improving economic picture.

All sectors other than utilities (-1.7%) advanced with consumer discretionary (+12.2%) and information technology (+9.2%) leading the index again, followed by industrials (+8.2%). US bourses are now approaching precarious territory with narrowing breadth and extreme valuation levels — at 24-times forward earnings, the S&P 500 is trading at its most expensive level since the tech bubble in 2000.

Looking ahead, the global debt glut and continued interest rate compression has us worried. So too the rise of modern monetary theory and ageing demographics in the principal economies. Inflation has been notably absent from the western experience for decades, but we are now worried for its return. And there is a possibility of not just inflation, but hyperinflation.

The managers are cautious on the tenuous global economic position despite stabilising COVID-19 infection trends. The upcoming US elections, narrow markets on elevated valuations and rising geopolitical tensions could each materially weigh on markets. The funds retain S&P 500 hedges to protect against these elevated risks.