Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

The prospect of some festive cheer in December seemed to dim a little this week as fears grew about the likely progression of the coronavirus pandemic over the winter. Markets ended October in a decidedly downbeat fashion hampered by this as well as confirmation there would be no new stimulus package for America prior to the presidential election.

The VIX Index – a measure of how volatile investors expect the US stock market to be over the next 30 days – rose to around 40, its highest level since June. The Index was at less than half this level for most of 20191.

The gloom over recent days is understandable. In more normal times, many of us would now be starting to look forward to one of the most anticipated times of the year, when spirits are lifted by parties, time spent with family and friends and the fabled “Santa rally” across financial markets.

However, the persistence of the coronavirus now casts doubts over whether such events can proceed as normal or, in some cases, even take place at all. Germany and France joined Britain, Italy and Spain this week in announcing stricter lockdown measures as new cases of the virus continued to climb.

It’s important though to be able to disassemble our personal reservations about the season ahead from the prospects for our investments. We saw evidence of that as recently as in March, when markets looked through the advent of national lockdowns and began to rise in expectation of an eventual economic recovery.

From the depths of spring, economies have, indeed, staged sharp recoveries. Data out this week showed the US economy bounced back more strongly than expected in the third quarter, recovering around four fifths (US$1.6 trillion) of the ground it lost the quarter before2.

We also enter a second wave of the coronavirus better prepared than in the spring, suggesting the effects on businesses may be more limited than during the first half of the year. Moreover, with social distancing now the norm, PPE stocks replenished and better treatments in hospitals leading to better patient outcomes, society is considerably better equipped to deal with the threat than it once was.

Meanwhile, vaccine trials continue at an accelerated pace, with frontrunners Pfizer and AstraZeneca both reporting further positive progress towards making their first formulations available by the end of the year3. There are now around 320 potential vaccines at various stages of development around the world4.

Then there are the post-Brexit trade talks which are, finally, moving towards a conclusion that can’t be delayed. That’s a positive in the sense that UK and European businesses will soon know for sure the rules they will have to operate under come 1 January.

We’re told the remaining stumbling blocks, now being talked through in Brussels, are few in number and involve fishing rights and the EU’s rules for limiting state aid to businesses. It’s hard, though not impossible, to believe the current UK government would cede a free trade deal in exchange for the right to save ailing businesses, but you never know. That leaves giving access to British waters to EU fishermen as perhaps the final big hurdle to overcome.

Currently it seems likely that markets will remain volatile at least until new cases of Covid-19 stabilise and the US election is done and dusted. The election took on additional importance this week after senators departed Washington to join their House colleagues on the campaign trail, thereby ensuring a further economic stimulus would have to wait until November at the earliest5.

From an economic perspective, who wins the presidential race to the White House next week will only be half the story. Which party wins the Senate will be the other, because the scale of the next stimulus measures for the US economy will depend on it.

For investors, the uncertainties dominating markets over the past week ought not to be seen as reasons to alter course. They represent a lack of clarity about the short term, not the longer term prospects for businesses and markets.

2021 promises to be the year in which the Covid-19 battle is largely won and many businesses begin to grow their earnings again. Central banks look set to maintain their support through ultra-low interest rates and governments seem to remain committed to spending their ways out of the crisis.

Multi-asset funds can work well for investors seeking an exposure to financial markets but with less risk than a fund investing only in equities. That’s because the assets they hold have the potential to behave differently from one another for a given set of economic conditions. That can be a big help in smoothing out investment returns through uncertain times.

The Fidelity Select 50 Balanced Fund is an interesting example, because it invests most of its assets in funds from across the investment industry that have made it onto Fidelity’s Select 50 list. It is highly diversified across countries and contains investments in equities (51%) bonds (34%) and cash. An annual charge of 1.24% covers the fund’s fees as well as the charges of the underlying funds.

Source:

Cboe, 28.10.20
2 Bureau of Economic Analysis, 29.10.20
3 The Times, 28.10.20; The Guardian, 27.10.20
4 World Economic Forum, 02.10.20
5 CNBC, 29.10.20

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Select 50 is not a personal recommendation to buy or sell a fund. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

Topics Covered

Active InvestingGlobal; Investing principlesVolatility

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