Global Investment Commentary

For Professional Clients only. Not for distribution to or to be relied upon by Retail Clients.

Q3 2020

Market Round Up
The third quarter highlighted the importance of geographic diversification. Asian equities returned 6.94% but are up by just 0.66% year to date. Meanwhile, UK equities fell by 4.02% and are down a little over 20% since the beginning of the year. European equities also lagged, with returns of 1.50% and -7.32% for the quarter and year to date respectively. More positively, US equities delivered nearly 9% over the quarter and are up slightly more than 5.50% so far this year.

Performance of major equity markets during Q3 2020:

UK
In the UK, fiscal stimulus appears to be fading. The newly announced Job Support Scheme is less generous than the furlough scheme. With the furlough scheme winding up at the end of October it is our conclusion that this will likely lead to a rise in unemployment. While the number of people on furlough has declined, it remains significant, having fallen from a reported 32% of eligible jobs at its peak, to our estimate of around 10% at the start of September. In contrast to the UK, support measures for workers affected by COVID-19 elsewhere in Europe have been extended.

There was a meaningful move lower by sterling in September (down 3% against the dollar), with a lack of progress in the Brexit negotiations being the most likely explanation. Discussions have been complicated by the UK government’s placing of the Internal Market Bill before parliament. This bill seeks to ensure trade between all four home nations remains barrier-free after the Brexit transition period ends on 31 December 2020. The major issue is how that can apply to Northern Ireland when it shares a border with the Republic of Ireland, which will remain in the European Union (EU). However, the bill has become contentious as if it was passed and the law ever invoked it would potentially override part of the legal divorce agreement with the EU.

There are a number of permutations in terms of the eventual outcome of the Brexit trade talks. No deal would lead to terms being set by the World Trade Organisation (WTO) and the associated difficulties that would come with them. Another possibility is a deal that would require the UK to back down and agree to various EU stipulations around state subsidy, fishing rights and the European Court, in return for a free trade agreement. What is widely considered to be the most likely outcome though, is a half-way house, involving a limited trade agreement with considerable transition arrangements to ease the ‘day one’ burden of change.

The prospect of no deal is also influencing expectations of Bank of England (BoE) policy. The bank is currently reluctant to fully endorse a shift to negative interest rates, despite market pricing suggesting otherwise. Governor Andrew Bailey has said that while negative rates are “in the toolbag” they are not currently on the agenda. Having observed zero rates failing to create economic growth over an extended period in Japan and more recently in Europe, it would perhaps be a little surprising if this was a policy that the BoE were to follow. Ten-year Gilt yields ended the quarter at 0.24%, up slightly over the quarter but down from 0.80% at the start of the year.

US
US ‘growth’ stocks – as epitomised by the FAANGs, (Facebook, Amazon, Apple, Netflix, and Google’s parent Alphabet) – have been beneficiaries of the COVID-19 environment. However, they came under some pressure in early September, having had a good quarter until then. With valuations still high by historical standards, a vaccine-driven rotation could potentially lead ‘growth’ stocks to underperform cheaper ‘value’ stocks. On the other hand, ‘value’ stocks remain particularly exposed to the worst-case scenario of a bad winter without positive vaccine news.

The US election is also heating up, with polls now suggesting that President Trump has gained ground in some key swing states, such as Florida and North Carolina, but still needs to make further gains in at least two of the other key swing states of Arizona, Michigan, Pennsylvania and Wisconsin if he is to retain the presidency.

The race for the White House and control of the Senate has gained even more importance than usual in light of the pandemic. This is because the Democrat-controlled House of Representatives and Republican-controlled Senate have failed to agree on further fiscal stimulus measures to support those who have lost their jobs. Whether the US passes further fiscal stimulus measures postelection will be important for the economy and markets in the coming months.

On the monetary policy front, the big news over the quarter was the Federal Reserve’s shift to average inflation targeting, allowing inflation to run above target for a while to compensate for periods of below-target inflation. The key implication is that rates are likely to remain lower for even longer. US 10-year Treasuries ended the quarter with a yield of 0.7%, broadly flat over the quarter but down from 1.9% at the start of the year.

Performance of major equity markets year to date (2020):

Conclusion
The final quarter of the year could be particularly eventful. By January, we should know the outcome of the US election, Brexit and whether the US Congress has passed more fiscal stimulus measures. Most importantly, there is a good chance that we will get news on a vaccine. For now, we continue to believe the focus should be on diversification, both regionally and by asset class, with alternative and targeted absolute return strategies playing an increasingly important role in portfolio construction. It is also worth considering which sectors will benefit most if we get good news on a vaccine.

As has been the case for most of the year, finding the optimum position between protecting against a potential retracement and harnessing growth continues to be a sensitive balancing act. Vigilance and decisive asset allocation will be key to managing portfolios in order to achieve their respective investment objectives and risk profiles.

Risk Warnings
The following is a summary only of some key items in the Prospectus. Capital is at risk. Investors in Protected Cell Company (PCC) must have the financial expertise and willingness to accept the risks inherent in this investment. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds. The Master funds will be exposed to stock markets. Stock market prices can move irrationally and be affected unpredictably by diverse factors, including political and economic events. It should be appreciated that the value of Shares is not guaranteed and may go down as well as up and that investors may not receive, on redemption of their Shares, the amount that they originally invested. Investment in the Company should only be undertaken as part of a diversified investment portfolio. Investment in the Shares should be viewed as a medium to long term investment. Shares may not be redeemed otherwise than on any Dealing Day. There will not be any secondary market in the shares of the Company.

Regulatory Information
This material is for distribution to professional clients only and should not be distributed to or relied upon by any other persons. The Cells referred to are a cell of Marlborough International Fund PCC Limited (the ‘Company’), a protected cell company incorporated in Guernsey and authorised as a Class B Collective Investment Scheme under the terms of the Protection of Investors (Bailiwick of Guernsey) law, 1987, as amended. Investment may only be made on the basis of the current Prospectus, this can be found on the website www.marlboroughinternational.gg. Marlborough International Management Limited is incorporated in Guernsey. Registration No. 27895. Regulated by the Guernsey Financial Services Commission. It is not protected by any investor compensation scheme. Licensed under The Protection of Investors (Bailiwick of Guernsey) Law 1987. Guernsey Office: Town Mills South, La Rue du Pre, St Peter Port, Guernsey GY1 3HZ. Tel: +44(0)1204 589336.