The return on LD Discretionary, the largest investment fund within The Cost-of-Living Allowance Fund, stood at -1.8% on 30 October 2020. Over a 36-month period, the return is positive at 5.8%. New spikes in infection rates, major lockdowns across Europe and uncertainty surrounding the US presidential election on 3 November are currently weighing on the stock markets.
New lockdowns in Europe
Rising Covid-19 infection rates in Europe are causing great concern. Many European countries are experiencing record-high infection rates, which has prompted governments to reintroduce strict restrictions. The likelihood of another full lockdown in Germany, France, Spain and the UK is relatively high, and the financial markets are reacting negatively to this. The yield on German 10-year government bonds has thus fallen from -0.5% to -0.62% in October, and many European share indices have fallen by 5–7%.
The European Central Bank (ECB) has recently announced that the economic situation in the eurozone is worse than initially thought. Fiscal stimulus has played a key role in averting a deep economic crisis and collapse during the first half of the Covid-19 pandemic. Now that Europe is once again facing strict restrictions, economies may come under further pressure. The fiscal stimulus packages have been historically large and extensive, and these massive injections of liquidity have led to an increase in the money supply. There is a consensus that an extension of these support packages for businesses is necessary for as long as lockdowns and restrictions remain in place.
US presidential election prompts caution
In the US, too, infection rates are rising in many states. Furthermore, the economic support packages introduced in the spring and summer are due to expire, and new relief measures are needed to support many businesses and employees. In the run-up to the presidential election on 3 November, the lines between the two parties have been sharply drawn. The likelihood of agreement on a major fiscal stimulus package is slim. A reasonably certain victory for Joe Biden and the Democrats would provide greater certainty regarding the political direction and the possibility of further support packages. A close election result between Donald Trump and Joe Biden, on the other hand, would lead to greater uncertainty and volatility in the stock markets.
Positive trends in both the short and long term
The latest reporting season for the third quarter of 2020 has so far brought more positive surprises than negative ones. Many listed companies therefore appear to have fared better through the coronavirus crisis than had been feared. However, there are still a number of companies, particularly in the tourism and experience sectors, where the risk of further bankruptcies remains high.
In the short term, continued volatility in the stock markets can be expected as long as Covid-19 infection rates remain high in Europe and the outcome of the US presidential election is potentially delayed. In the medium to long term, it is assessed that a continued low-interest-rate environment will be positive for risk assets, which includes, amongst other things, rising equity markets.
