Soaring COVID-19 infections impact asset markets and the US election results unfold

XPS investment news - November 2020

Bringing you our market round-up and the latest news affecting UK pension scheme investments.


US election update
At the time of writing, global markets are assessing the impact of the likely US election result and fall-out. Although the Democrats look to have taken the House, their hopes of gaining control of the Senate have diminished. This unexpected twist could become an important issue.


Month In Brief

  • Soaring COVID-19 infection rates led to the re-imposition of lockdown restrictions in Europe over the month 
  • Global equities suffered their worst week since March to cap off the period

Figures released over the month that showed record growth for the US and certain large European economies over Q3 2020 were overshadowed by soaring new COVID-19 infections and hospitalisations over October, and the subsequent re-imposition of virus-related lockdowns to stem the spread of the virus across Europe.

Global equities suffered their worst week since March over the last week of October and returned negatively over the full period as a result. The market remained extremely volatile throughout and the Vix index, a measure of expected volatility in the US stock market, increased to a level that is double its long-term average. The final stretch of the US election also contributed to this equity market volatility. Emerging market equities materially outperformed developed market equities. Corporate bonds remained resilient.

Emerging market equities were the strongest performer over the month

One Month to 31 October 2020

UK Prime Minister, Boris Johnson, unveiled further stimulus measures to help offset the impact that the new lockdown measures are expected to have on individuals and businesses, including the extension of the Furlough scheme until the end of March and the extension of mortgage holidays, amongst other measures.  The Bank of England reinforced the economic support available on 5 November, voting to purchase another £150bn of government bonds.  

The eurozone economy grew at its fastest rate of expansion since records began in 1995, growing 12.7% in the third quarter. However the new restrictions imposed are expected to plunge the bloc back into contraction for the final quarter of the year. The bloc also continues to struggle to generate inflation and experienced its third consecutive month of deflation in October, and its 5 month labour market recovery ended in September with jobless numbers rising. China’s economy continues to bounce back from the virus and expanded 4.9% year on year in Q3.

US output rebounded, with GDP growing by 33% over Q3. Output for both the US and Eurozone, however, remain below pre-pandemic levels. No agreement was found for new fiscal stimulus in the US but new US jobless claims fell to near their lowest level since early March over the month, although remain elevated.

The funding level of a typical scheme would have worsened slightly over the month. 


The typical scheme used has an assumed asset allocation of 24% equities, 33.8% corporate bonds, 12.6% multi-asset, 5% property and 24.6% in liability driven investment (LDI) with the LDI overlay providing a 60% hedge on inflation and interest rates. This example scheme was 80% funded in 2015.

 

To discuss any of the issues covered in this edition, please get in touch with Ben Amenya