Investment market update: October 2020

In October, there were signs of economic recovery from the impact of Covid-19. However, over the month, many countries have reimposed restrictions and, in some cases, full lockdown, to stem the spread of the virus. As a result, it’s expected that volatility and uncertainty will continue into winter.

The International Monetary Fund’s (IMF) Managing Director Kristalina Georgieva warned that the Covid-19 crisis is far from over despite the world economy looking better. The IMF also added that it’s too early for governments around the world to end support schemes.

UK

The latest economic growth figures for August show the economy is slowing, despite the Eat Out to Help Out scheme designed to boost spending. The economy grew by 2.1% but failed to meet expectations.

On Halloween, Prime Minister Boris Johnson announced the country would be entering lockdown for four weeks. It’s a move that is set to have a severe impact on the economy and businesses. The UK borrowed £36.1 billion in September 2020, a record and far more than economists were expecting. With a new lockdown to support, this figure is likely to climb even further.

One of the areas of concern is the unemployment rate. The jobless rate hit 4.5% in the three months to August, a three-year high. There are warnings this will increase much further too. The Centre for Economics and Business Research (CEBR) warns that at least 1.25 million people are at risk of losing their job before Christmas. This would take the number of unemployed to almost three million and the rate to 8% for the first time in a decade.

The findings over the last few months point to a tough winter with economic uncertainty at the centre.

The entertainment industry has been particularly affected by the lockdown restrictions. One of the big names to speak out this month was Cineworld, which has closed all UK venues. The firm said it can’t stay open without major new films as studios push back release dates. The company’s shares halved in value following the announcement. Odeon followed this by saying it also planned to close a quarter of its cinemas.

According to a CBI report, UK retail sales fell sharply, as did orders placed on suppliers, as restrictions increased.

Some firms have benefitted from the social distancing restrictions though. Asos has seen its profits quadruple by adding three million customers as demand for online shopping soared. However, the firm has remained cautious, citing Brexit as a risk area.

Following falling high street footfall and spending, online shopping is providing opportunities for retailers. One business keen to take advantage of this is John Lewis, which has committed £1 billion to an online push.

While Covid-19 continues to dominate headlines, the UK’s economy will also be affected by Brexit. When Boris Johnson signalled a no-deal Brexit could be on the horizon, the pound fell as a result. However, both the UK and the EU have since said that a deal is still possible. The outcome of negotiations remain to be seen as the deadline draws nearer.

Europe

The Eurozone posted record growth of 12.7% between July and September but the figure is marred by further statistics that suggest hardship ahead.

After factory figures suggested the eurozone was recovering, the pace is now slowing. In August, production across the area increased by 0.7%. However, this still leaves production 7.2% lower than a year ago, highlighting the impact Covid-19 has had on economies.

The private sector is also shrinking again. In October, a PMI of 49.4 was recorded, where a reading below 50 signals contraction. Germany was described as the only bright spot.

This is linked to rising unemployment. The economic area saw unemployment rise for the fifth month in a row in August to 8.1%. The has disproportionately affected some countries, with Spain recording an unemployment level of 16%.

The European Central Bank (ECB) left its policy unchanged in October but has hinted it will act if needed. The next ECB meeting will take place in December.

While challenging, the current climate has presented an opportunity for investors too. The European Union launched the first of its new coronavirus related bonds, which will fund Europe’s recovery efforts. There’s been high interest from investors, with reports that the bonds are 14-times oversubscribed.

US

At the beginning of the month, President Donald Trump tested positive for Covid-19, impacting markets around the world. However, as he went on to make a full recovery, they did stabilise.

One of the headline figures from the US is its GDP as the country returned to growth. In the third quarter, the US posted an annualised rate of 33.1%, the strongest quarterly growth on record. The figure indicates the economy is taking steps towards recovery, but other statistics show this may not be the full picture.

The US trade deficit, for example, reached a 14-year high. The gap between imports and exports rose by $67.1 billion, a jump of almost 6%.

Of course, the key thing that will affect markets and the US economy in the coming months is the upcoming election. As Trump has said there will be no stimulus package until after the election is concluded many businesses could be left struggling.

Remember, while your investment portfolio may experience volatility to focus on the long term. Carefully think about your wider financial plan before you make changes to your investment strategy. If you’d like to discuss what recent changes mean for your investments, please get in touch.

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Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.