What is behind it
Global equity markets are again at a level similar to one month ago, but volatility has increased. A correction had started at the time of our September update, and it got more pronounced. US tech stocks came down by 12% from the peak. Some of this has already been recovered. But the correction also impacted stocks from sectors that hadn’t done so well earlier this year – for example oil companies falling by 10% in September (following what was already a rather modest recovery), resulting in a loss of 40% over the last 12 months.
There are valid concerns. The coronavirus is spreading faster again, the US election carries uncertainty, the US-China conflict is not relaxing, and a hard Brexit looks as likely as ever. But more importantly, by September a global stock price correction was just overdue following the rapid and pronounced recovery from the market panic in March. Particularly for the tech dominated Nasdaq market in the US the air had become very thin
after having gone up by more than 70% without any significant corrections.
Fundamentally, signals remain cautiously optimistic. In Q3, China’s economy expanded by a robust 5%. In the US and Europe, the services sector seems to lose momentum, but manufacturing shows a strong recovery (particularly in the US and in Germany). Central banks provide ample liquidity; and the expectation of recovery
programs continues to support the markets.
Following the April shock, the oil price recovered but remained far below pre-crisis levels only to lose 10% again in September, reflecting concerns about the economic recovery losing momentum. Accelerated coronavirus infections are not helping. And we don’t know if oil demand will ever get back to pre-crisis levels.
The US elections: The first presidential debate offered very little in terms of facts. What may stand out most
is Donald Trump’s refusal to indicate acceptance of defeat should Joe Biden win.
What it will mean
Arguably the worst scenario out of the US elections would be a narrow victory of Joe Biden followed by Donald Trump challenging the result and leading to a constitutional crisis. Once that dust has settled, the question of who becomes the next US president is not necessarily too important for equity markets overall. Historically, the US stock market has not performed worse under democratic than under republican presidents. Don’t expect the relationship with China to be drastically impacted, either – a tougher stance on China seems to be one of the few topics on which Republicans and Democrats agree. The biggest impact of a Biden win may be on the energy market. He may endeavour to resurrect the nuclear deal with Iran which could lead to significant additional volumes of crude oil entering the market quickly. And democrats seem to be more committed to
sustainable energy policies which could provide another boost for new energy.
But even if Trump gets re-elected, there is no way back on green energy. Europe is leading the way with further tightened climate targets – by 2030, EU members have to reduce CO2 emissions by 55%, and be CO2 neutral by 2050. Funds of €540bln are earmarked to address climate change. And regardless of the US government, investors have discovered sustainability as a core theme, with more than $1tn now invested in funds with sustainability themes. Blackrock as the world’s biggest asset manager is playing an ever-increasing role, scrutinising energy intensive companies and demanding ecological progress. Companies not delivering on sustainability targets are at risk of being eliminated from the funds. And even Norway’s $1tn oil fund is
planning to seek more sustainable investments. “Green” companies will be valued higher.
What to expect – and what to do
The September correction has improved the risk profile for equity investments. We don’t know if the correction has run its full course but we are entering the traditionally better part of the year, and in the IWG portfolios we have reduced liquidity cushions.
The days of hydrocarbons are not over. Petroleum based products will continue to be used for decades, and investments will be required to satisfy the resulting demand. Oil&Gas companies will play an important role, and they will make money. But it becomes more questionable how that will be rewarded by equity markets. In IWG we have responded by shifting our investments towards sustainability. For example, stocks of new
energy producers now have a heavier weight in portfolios than those of classic Oil&Gas companies.
For investors, it is important to identify paradigm shifts – and even more important to properly time the required adjustments to portfolios. For clients using our portfolio management services, we take care of that. Others we suggest should work closely with their financial advisors in order to benefit from the world’s key trends.
The content of this report is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained in this report constitutes a solicitation, recommendation, endorsement, or offer by IWG or any third-party service provider to buy or sell
any securities or other financial instruments in this or in in any other jurisdiction.