At a glance: What you need to know from last week

Key takeaways from last week, plus economic events and investment considerations for the week ahead.

Virus volatility creates opportunity as well as risk

Renewed COVID-19 volatility is an opportunity as well as a risk.

Global stocks had a volatile week, including two daily falls of close to 2.5% in the S&P 500 amid heightened worries over the spread of COVID-19 in select US states. Florida, California, and Texas all reported new record daily infection rates. California Governor Gavin Newsom said he was prepared to consider reimposing stay-at-home orders if conditions continue to deteriorate. Despite the discouraging news, we continue to expect that potential restrictions on mobility are likely to be localized. The worstaffected US states are still two to four weeks away from running out of intensive care capacity. We continue to see an economic recovery starting in 3Q, with central bank stimulus supporting stocks. But the ride could be a bumpy one. A disciplined financial strategy will avoid panic selling, or costly periods on the sidelines in cash. Investors with access to options can use put-writing strategies to earn a higher yield at times of higher implied volatility, or consider other structured strategies to ensure leveraged upside participation.

Takeaway: Rather than sitting on the sidelines when markets are volatile, investors can harness the volatility. Click here to read more.

Trade and tech tensions underline downside tail risks.

US quarrels with its partners over trade and technology made an unwelcome return to the spotlight last week. The US threatened to levy USD 3.1bn of tariffs on UK and European Union exports, related to a longrunning dispute over aircraft subsidies. In addition, the US Department of Defense identified 20 Chinese tech companies, including telecoms equipment group Huawei and video surveillance company Hikvision, which it says are backed by the Chinese military, according to Reuters. While both disputes are long-running, we see the latest instances of friction between the US and its trading partners as related to the US election story, which could add volatility if tensions escalate as part of President Donald Trump’s reelection campaign. For investors looking to insulate themselves from political volatility we recommend our “Campaign Warriors” theme, which comprises stocks of businesses that are relatively less exposed to policy change proposals.

Takeaway: Investors should diversify globally, but also consider alternative diversifiers. Click here for more detail.

Hunt for yield gets harder, but opportunities remain.

The challenge of adding income to portfolios was underlined last week after Austria issued a 100-year bond with a yield of just 0.88%. The lowerfor- longer narrative was also highlighted by Bank of England Governor Andrew Bailey, who said that the central bank was considering selling bonds ahead of rate rises. Markets are not pricing rate hikes in the UK for close to 5 years. But despite the difficulty, we see opportunities to boost yield. The spread on both USD high yield credit and emerging market sovereign debt has narrowed sharply over the past three months—by 430 basis points and 165 basis points respectively—and a further sharp contraction is not part of our central scenario. Even so, the yields of 6.8% and 5.5% remain attractive in an environment of aggressive central bank quantitative easing. Investors can also turn to equity markets for income. We recommend a selective approach that focuses on companies with high dividends that are unlikely to be cut significantly due to the coronavirus crisis.

Takeaway: With rates at historic lows, investors will need to add yield to their portfolios. For more information, click here.

Week ahead

1. Is the COVID-19 uptick continuing?

Markets reacted to discouraging news on infection rates in large US states and the increased risk of renewed restrictions. Data on this issue over the coming week is set to be a major determinant of the market's direction.

2. Will trade tensions worsen?

Disputes between the US and major partners added to market anxiety last week. Further escalation would have a negative effect on sentiment.

3.Are we seeing a stabilizing jobs market?

The scale of job losses has become a key indicator of how swiftly nations will be able to recover from the economic trauma caused by the pandemic. Positive news this week from the US nonfarm payrolls, initial jobless claims, and Eurozone jobless data would help lift confidence in risk assets.


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