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- Markets have been calmer in the second half of 2020, though volatility remains elevated
- Certain areas of the market seem expensive by some measures
- The efficacy of health policy will be key in determining how long the pandemic lasts – further monetary and fiscal support is likely
- Changes to the global economy may cause higher inflation in the future but, near term, weaker demand is likely to limit a general increase in prices
- Active management will continue to be key – investors must identify the winners in the post-pandemic world
Lasting change for the global economy
After a volatile first half of the year, markets have behaved in a more sanguine fashion since June. The VIX index, a key measure of volatility, anticipating price moves in the S&P 500, shows that while volatility remains higher than it was before the pandemic, it has fallen significantly from its highs (see Figure 1).
Asset performance has been remarkably favourable. The global equity index ended September close to its prepandemic highs, though most of the gains are attributable to a handful of well-known technology stocks. This sector continues to surge higher, despite concerns over demanding valuations causing shares to correct from time to time. Some areas of the market have benefitted less – the energy sector remains over 40% below the February peak, on account of a weak outlook for oil demand. Other cyclical areas, such as industrials and financials have also lagged.
Within bonds, yields on government debt have fallen in all developed markets and across all durations, signalling that investors are willing to accept lower returns for a perceived safe-haven asset. This has had a ripple effect up the risk spectrum, causing bond yields to fall in the corporate space, too.
Lower bond yields also impact other areas of the market. For equity analysts, for example, they lower a key variable used to discount company earnings in their financial models, which magnifies the present value – or what analysts are willing to pay today – for a share of future earnings. This has helped sectors of the market where a greater emphasis is put on long term earnings growth – such as the aforementioned technology sector.
With bond yields tight and certain areas of the market richly valued, what are the factors driving growth from here and how are we approaching valuation?
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Any research in this document has been procured and may have been acted upon by Close Brothers Asset Management for its own purposes. The information is being made available to you only incidentally. The views expressed herein do not constitute investment, taxation or any other advice and are subject to change. They do not necessarily reflect the views of any company in the Close Brothers Group or any part thereof and no assurances are made as to their accuracy. Investments may not be suitable for everyone. Past performance is not a reliable indicator of future results. The value of investments and the income from them may fall as well as rise and is not guaranteed. An investor may not get back the original amount invested. Unless otherwise indicated, all information and opinions expressed in this document are those of Close Brothers Asset Management and are correct as of October 2020. CBAM6129.