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16th October 2020
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Graham BentleyGraham Bentley

Avellemy commentary for September 2020

Every month, people like me offer commentary and reflection on stock market behaviour over the previous month. There is a contradiction here, in that well-advised readers like you are long-term investors, not traders. However, share prices do vary on a daily basis because of news rather than fundamentals; trying to use news to predict shorter-term market moves is a mug's game - outcomes have a habit of not following the script.

Any success you might have in predicting the winner of a talent show does not depend on a personal preference, or even reliance on a sophisticated model of what is generally understood to constitute 'talent'. An understanding of what the judges' (ie the entire dare I say less sophisticated voting TV audience) preferences might be is more valuable. In stock market terms, market traders price shares not based on what they think their true value might be, but rather on what they think everyone else thinks their value is. In other words, in the short term it is more important to understand what participants think will happen, rather than guessing what will happen.

Consider the events of September. COVID19 is back with a vengeance in the US and Europe, while President Trump has renewed his attacks on China, risking a renewed trade war in a bid to regain the initiative as the US election looms. As if that weren't enough, the perceived 'less-business friendly' Democrat challenger Joe Biden extended his polling lead over the incumbent after US voters suffered a chaotic and unedifying Presidential debate. As I write, the President has tested positive for COVID, with confusion abounding regarding his true state of health, being treated with a steroid generally used in the most severe cases, while his staff suggest he will return to the White House shortly.

There was a so-called 'correction' in leading technology stocks, with the US Nasdaq index falling 7%, yet that benchmark is still 35% higher than it was at the turn of the year. The S&P 500 index eased back but is still 5% ahead for the year. As for the near future, the odds-on US betting markets indicate investors expect the Democrats to take the Senate in November, if not the Presidency. This would make further QE and a conciliatory trade policy more likely, supporting markets even if policy on regulation and tax policy proved favourable.

At home, the pound fell by 4% during the month as Brexit negotiations ground to a halt, not helped by the EU's anger as the government placed a Bill before parliament that seeks to modify the terms of trade between the UK and Northern Ireland enshrined in the original EU withdrawal agreement. Meanwhile, the UK has seen significant increases in the rate of COVID transmission to double the daily cases being reported at the height of the first wave in April. Opinion of the UK's state of health is not helped by the revelation that an error in an excel spreadsheet is said to be the cause of over 15,000 cases going unreported. The outside world's perception of the UK can be summed up via a quote from the New York Times regarding the UK's behaviour during the pandemic:

"... it has enhanced a widely-shared sense that Britain — famously rule-abiding — is now operating without adult supervision...a national mantra, “keep calm and carry on,” seems to have been reconfigured into the misguided notion that nothing is amiss."

There is greater success controlling COVID's spread in Asia - subway use in China is at 90% of last year's equivalent, but in UK is still only at 40%. Traffic mobility is back to where it was pre-COVID in China judging by data from TomTom, while France and Italy are significantly ahead of the UK. Asian stocks, particularly in China have accelerated, advancing over 20% in 2020 while the UK wider market was pretty much unchanged during the month - but ending September down 20% over the year.

Returning to fundamentals, any "Balanced" investor whose cup is generally half-empty might be excused for assuming a catalogue of bad news and uncertainty will have heaped detriment on their portfolios. However, September saw a small but positive rise in valuations. Over the year to the end of September, an investor within the Avellemy Active Risk Grade 5 portfolio would have experienced a loss of just 0.47%, in comparison to the 2.86% drop in the relevant Investment Association sector (IA Mixed Investment 20-60% Shares), or the 20% drop experienced in UK equities as mentioned above.

As the Narrator in CS Lewis's first Narnia book "The Magician's Nephew" reminds us...

“What you see and what you hear depends a great deal on where you are standing. It also depends on what sort of person you are.” 


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