Investments Update – The Global Economy and Tech Stocks – September 2020

A Mixed Economic View for September

After a fairly promising summer for many developed economies and markets, the increase in COVID-19 cases during September has become a grey cloud on the investment horizon. Several European countries – such as France and Spain – are currently suffering from a ‘second wave’ of the virus, which has led to them achieving much weaker economic performance than previously hoped for. Emerging markets like Mexico and India have been hit hard too – as with many countries that are less equipped to manage virus outbreaks effectively, their economic growth forecasts have been cut back.

However, there is encouraging news. Despite being roughly 11% smaller than it was back in February, before the pandemic took a firm hold of the world, the UK economy recovered well in June and July. August also benefited from factors like the government’s “Eat Out to Help Out” scheme and more people having ‘staycation’ holidays, which gave a helping hand to the high street and local businesses. Official data (the Purchasing Managers’ Index) even put the UK in gold medal position for economic growth in August, ahead of the US, China and the Eurozone.

While the arrival of September was joined by a dip in the UK stock market – which was arguably a knee-jerk reaction to market falls in the US – the situation subsequently improved. We will continue monitoring the number of regional lockdowns being introduced too, as this could stall or reverse the recovery we have seen. The more lockdown pockets there are, the worse it will be for our economy and, with UK schools and universities reopening their doors, there is no denying the greater risk of a prolonged ‘second wave’ occurring.

Technology Stocks Across the Pond – Over the Hill?

The number of new virus cases in the US continues to fall, which is a step in the right direction – good for its people, businesses and economy. However, this did not stop US stock markets from a nervous stumble in the first half of the month, when its major technology businesses fell in value. Household names such as Apple and Microsoft led the falls, as investors began to question whether the technology sector had risen too far and too fast.

We believe that many technology companies have reached unjustifiably high prices, priced on the expectation that they can go on to achieve a level of growth that seems wholly unrealistic to us. We fully expected a ‘sell-off’ to occur and, as a direct result, for values to drop; however, we still believe that there are further drops ahead. While we have some exposure to the technology sector in our moderate and higher risk funds, we will only look to increase investment if the price reflects true value for our funds and customers.

What Lies Ahead for Markets?

The hunt for an effective vaccine may continue, but markets are largely taking all COVID-19 developments in their stride. When compared to the chaos back in March 2020, stock markets are ‘higher’ overall, which is better news for investors, but markets such as the UK still have some way to go before getting back to their previous heights.

Less-advanced economies continue to struggle, but the growth forecasts for developed economies have stabilised, which we can take as a sign of better things to come. Any growth achieved is likely to be against a backdrop of volatility and further growth from this point will be difficult for many countries, but any form of growth during a pandemic is something to be positive about. In the coming weeks, we will be keeping a closer eye on UK-EU relations.

There have been heated disagreements on both sides of the Brexit trade talks table – with a few helpings of political bickering – meaning a formal ‘end of year’ agreement seems increasingly unlikely, though not impossible. Some UK businesses risk approaching the end of the year with a Brexit blindfold on and at least one hand tied behind their back due to COVID-19, which could lead to greater market volatility. At Wesleyan, our Fund Managers are prepared for a whole range of scenarios, including the possibility of ‘no deal’, and we have our eyes wide open to the risks and opportunities that such a situation could present us with.