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Investors should remain watchful of political and economic risks which could destabilise markets
Thursday 17 Sep 2020 Author: Tom Sieber

The initial market rebound from the coronavirus correction was rapid as investors dusted themselves off and, aided by central bank and government stimulus and vaccine progress, looked towards a recovery for businesses and the economy.

The story of the third quarter has been one of relative resilience for the markets despite a complicated backdrop of mounting political risk and apparent evidence of a second wave of coronavirus infections.

The FTSE All-World index, encompassing the major developed markets, is up more than 9% since 30 June. In part this reflects the heavy weighting of the US where, despite a recent wobble, tech stocks have helped lead a strong advance with the Nasdaq 100 up by double digits.

Chinese stocks have also enjoyed strong gains over the summer. Shanghai’s CSI 300 index is up nearly 12% in the third quarter to date, helped by data showing economic recovery.

The FTSE 100 is the obvious laggard so far in the third quarter, falling by more than 1.5%. This likely reflects the index’s heavy weighting to areas like oil and gas and mining and much smaller representation for sectors such as technology which are perceived as relative winners in the pandemic.

The UK also continues to wrestle with the issue of Brexit with legislation being introduced which would alter the exit deal agreed with the EU and by the Government’s own admission break international law.

This has led to increased fears of an unruly end to the transition period at the end of this year and has put pressure on sterling. Most observers believe the deadline for any kind of deal between the UK and EU is October.

By that point attention may have turned firmly to the US and its presidential election – where Democratic hopeful Joe Biden holds a healthy lead in national polls but his attempt to unseat incumbent Donald Trump may well come down to a few battleground states. This raises the sceptre of an extremely tight race and a disputed outcome.

Finally, there remains plenty of speculative money in the markets, with a recent report from Bloomberg revealing record inflows upwards of $1.5 billion into US exchange-traded fund ProShares UltraPro QQQ – which offers three-times leveraged exposure to the Nasdaq index.

The multitude of issues bubbling away would suggest another global market correction is not out of the question either this year or early 2021, meaning it is worth having cash on hand ready to invest in quality businesses at more attractive prices should the opportunity arise like it did in March.

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