Henry James International Management October 2020 Market Commentary

For the second consecutive month we have seen negative returns in the MSCI EAFE index, down -3.98% in October. Of course, no one is surprised by this given the ways in which the second COVID-19 wave has renewed its devastations on economies and businesses and people who participate in them. What was not anticipated was the outcome of the US Presidential Elections and the subsequent fractious (non)transition period. Indeed, of perhaps greater importance is that we are on the threshold of having not one but two COVID-19 vaccines ready for use before the year’s end; and it seems a certainty that they will be available for widespread uptake in 2021.

October’s top performing equities were on the value side of the index with utilities, industrials, materials and financials leading the way. Conversely, we continued to see a pull back in the consumer discretionary, communication services, information technology and energy sectors through the October 30, 2020 market low.  Our stock selection in the consumer durables and health technology sectors improved portfolio performance in October.

Joe Biden’s projected presidential election victory has been embraced by markets at home and around the world. We suspect this is less to do with any partisanship and more to do with a much-desired sense of certainty, which markets particularly enjoy. We believe that a Biden victory would be rendered even sweeter for investors if the two outstanding undecided Georgia Senate seats persist as Republican as it would foster a situation in which our Constitution’s celebrated ‘checks and balances’ would come to the fore and make it difficult for Washington to do anything overly bold, controversial and unsettling in terms of tax code or spending policy changes. In short, we believe economies prefer to be un-obstructed in their dogged pursuit of growth and a government in gridlock achieves just that. Despite this, we anticipate a Biden Presidency will successfully negotiate (or more likely Senate Majority Leader Mitch McConnell and Speaker of the House Nancy Pelosi) a bi-partisan COVID-19 economic stimulus package. We also expect the US Federal Reserve to be playing the role of spotter to make sure there is good liquidity to continue to aid the economic recovery.

Beyond our shores, the economies that did the best in October and who have been generally performing during the pandemic are the ones who have been able to contain the virus through a range of measures that include throwing civil liberties to the wind, individuals being responsible (i.e. wearing a facemask and social distancing) and sometimes a combination thereof. This includes China, Taiwan, Japan, South Korea and Vietnam. In the West, by contrast, where civil liberties are the end all, be all (we think with extremely good reason) and citizens are less primed to make the necessary sacrifices in unison to control COVID-19, we have seen a crushing second wave. While deaths have generally been less than what we saw during the first wave (at least as a percentage of infections), infections have reached heights that would have seemed an implausible worst-case scenario a matter of months ago. Consequently several European nations including France and Britain are either in full lockdown or in the midst of severe restrictions, which, while possibly necessary to control COVID-19, is absolutely punishing for economies. While some may have been a tad slow off the mark, European governments and central banks are responding to keep their economies afloat. Moreover, December will see the European Central Bank meet to discuss extending and expanding their pandemic policy packages.

And yet, while it seems that we were heading nowhere rather quickly in terms of managing COVID-19 and the ways to keep economies chugging along, on November 9th Pfizer/BioNTech announced the development of a vaccine with 90% effectiveness. On November 16th, Moderna followed suit with a vaccine with 95% effectiveness. The FDA (and the equivalent in other countries) are expected to authorize the vaccines by the beginning of December, which means that it is not only possible but actually likely that vaccines will be distributed and injected in 2020. There are several more vaccine candidates that are expected to announce their own successful trials in due course, which means that the next pressing issue becomes production and dissemination. The developed world requires at least 1 billion doses, and despite the likelihood that we will have a range of vaccines from which to choose, it is impossible to imagine that achieving such a quantity will be a bump-free experience. Moreover, less wealthy countries will be at the back of the line when it comes to vaccinating their citizens, whose numbers far exceed the developed world’s already daunting 1 billion, which will likely present a production and distribution headache as a best case scenario. Furthermore, there is the anti-vaxxer movement that includes the COVID-19 iteration that bizarrely purports that a vaccine would entail injecting a Bill Gates-designed microchip directly into the blood stream to monitor our daily movements and far more. Despite being farcically far-fetched, the fact is that we live in an era, vis-à-vis QAnon, in which pernicious myth can very easily masquerade as established fact. And yet, we are delighted that both President Donald Trump and President-elect Biden have both unequivocally endorsed getting vaccinated as soon as it is possible, which should offer significant encouragement to the full range of the American electorate.

Last month we said that markets can and do succeed regardless of which party occupies the White House. They performed under Presidents Obama and Trump; and a couple of weeks into the Biden President-elect era things are shaping up rather nicely, too. There is a reason for this: business transcends partisan politics and market performance is generally based on both current and perceived future corporate earnings. Adding to this, with power shared between Democrats and Republicans across Washington as well as the emergence of a slew of potentially world-saving COVID-19 vaccines, we believe omniscient markets are predicting better times ahead and a return to normality in 2021.

Disclosures

This material is prepared by Henry James International Management and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information and opinions contained in this material are obtained from proprietary and nonproprietary sources believed by Henry James International Management, to be reliable, are not necessarily comprehensive and are not guaranteed as to accuracy. No warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions is accepted by Henry James International Management, its officers, employees or agents. This material is based on information as of the specified date and may be stale thereafter. We have no obligation to tell you when information herein may change. Reliance upon information in this material is at the sole discretion of the reader. Certain information contained herein may constitute forward-looking statements. Estimates of future performance are based on assumptions that may not be realized.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Any indices chosen by Henry James International Management to measure performance are representative of broad asset classes. Henry James International Management retains the right to change representative indices at any time.

Henry James International Management and its representatives do not provide legal or tax advice. Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation.

Henry James International Management September Market Commentary

After five consecutive months that saw the MSCI EAFE index deliver positive returns, September was down -2.60%. Despite this fall, September was a good month for materials, industrials, consumer discretional, information technology and communication services. We were over-weighted in consumer discretionary and information technology and underweight in financials, which generally helped our portfolio performance on both fronts.

As we tumble headlong into Autumn, our question is whether the overall September slump is a blip in the market’s performance that has defied the destructive effects of the pandemic to this point, or is it a sign of things to come for the fourth fiscal quarter and first half of 2021? Of course, it is entirely possible for an economy to be in a midst of a recession while markets go from strength to strength; indeed, if there was any doubt COVID-19 has made it unequivocal. Jobs and businesses are under threat and in many cases are evaporating, and yet those with money in the market for the most part have become wealthier.

In spite of COVID-19’s drag and the recent market blip, global economic growth has remained strong and September marked the 5th consecutive month of falling unemployment in the US, which has diminished to 7.9%.  To put this into perspective in February the unemployment rate was at the 50 year low of 3.5% and then after the outbreak it reached a high of 14.7% in April.  There was additional good news during the month when the consumer sentiment index improved for the second month in a row in September. The index and lower unemployment further points towards a V shaped recovery for the US.

Yet, despite our optimism and the market’s pandemic track record so far, COVID-19 has more than enough poison to bring equities to their knees. While the US’s COVID-19 infections and deaths were less in September, the numbers were still unnerving: 1.16 million infections and some 22 thousand deaths. The spirit of optimism begs us to think our numbers will continue to diminish; however, using the rest of the world as an example, even the most fastidious measures are no match for the winter season encroaching upon us (and, let’s be frank: our measures in the US are far from fastidious). It consequently stands to reason that we will see a second wave, too. Of course, it is a possibility that the second wave will be more benign than the first – but a second wave of any sort will likely not be good news for investors. Latin America, for instance, consolidated its place atop the league table in September for total cases and deaths, at 9.6 million and 350 thousand, respectively. Markets responded by falling by -5.11% as measured by the MSCI Emerging Markets Latin America index. Europe and Britain are fully in the midst of its second wave (a thoroughly un-benign one, we might add), with the former’s equities falling by -3.32% in September as measured by the MSCI Europe index and the latter’s by -4.98% as measured by the MSCI United Kingdom index during this same period. Unless the pandemic improves, one does not imagine these numbers will change dramatically, or really at all. Indeed, should things continue to worsen, one would not be surprised to see U.S. markets erode even further. If a second wave is damaging market performance in the rest of the world, it would be naïve to assume it will be different back home.

Of course, optimism may be an easier ideal to embrace if a vaccine were just around the corner. Yet, despite what President Trump may suggest, a more clear-headed assessment of the facts would suggest that positive phase 3 trial results may be available any day now to the middle of next year. If results are positive, a vaccine could receive regulatory approval within a month, which experts believe would allow for early dissemination to vulnerable groups and front line key workers shortly thereafter. However, it would still apparently take another 6 months for full phase 3 trial data results to come in and be analyzed before mass public vaccinations could begin – and this would assume that everything every step of the way will go according to plan. In short, if we listen to the doctors and scientists, most of us will not have a vaccine at our disposal for a good while yet, which – aside from the worrying health realities that entails – suggests markets will have unusual volatility influencing them well beyond winter 2020/21.

But it is not all dire news: we are now pretty good at fighting COVID-19 once somebody is infected, in terms of anti-viral drugs, steroids and antibody treatments. Indeed, the poster boy for the effectiveness of such a cocktail is President Trump, who has apparently convalesced very nicely. Of course, while we all should be eager to remember that most of us are not afforded the same level of healthcare enjoyed by the leader of the Free World, the evidence is clear to see that the medical community actually knows how to fight COVID-19. Despite infections continuing to soar, death rates are very low, and one assumes that our ability to treat the virus will only improve, too, which is a great cause for hope for our lives and health in a pre-vaccine world. Of course, it is also brilliant news for economies and markets as it may well be possible to live, spend and consume with relative liberty while COVID-19 is hanging over us.

Last month we asked if governments and central banks had the appetite (or liquidity) to bail everyone and everything out again. In America ‘appetite’ may have been the wrong word, as the impediment seems to be rather pre-election partisan bickering which is blocking any chance at a modest stimulus package. As ever, we hope cooler heads prevail. This often seems like a vain hope and yet it frequently materializes at the last moment. In the UK, Chancellor Rishi Sunak is attempting to be more financially conservative (ironically not difficult given how the economy was effectively nationalized for 6 months) in his attempt to offer another lifeline to workers and business; however, it is becoming increasingly apparent that the UK’s second wave will likely require something a bit more similar – or even more robust than – his fiscal response to the first wave. According to European Central Bank President Christine Lagarde, wide-ranging fiscal support is essential to guide economies through the pandemic. We agree and hope that governments and central banks will not lose their nerve and recognize that they must keep digging into their pockets if economies (and markets) are going to be in relative ship-shape at the end of the pandemic.

The final item to touch upon before we check out is the November 3rd US General Election. While it may stand to reason that a Trump victory may be a good thing for markets in the short term – and possibly even beyond – and a Biden victory may temporary subdue equity performance – one would be wise to remember that markets can succeed and fail in both Republican and Democratic White Houses. What is more, the performance of the stock market is generally based on both current and perceived future corporate earnings. Based on this, we believe that markets are predicting better times ahead above and beyond the transient joy/dismay the winning and losing sides will feel once the election’s result is declared. With that in mind, maybe the markets know something we all do not: that a vaccine is imminent; that economies are resilient enough to have a V-Shaped recovery in the face of adversity; that markets will continue to perform; that life may return to normal sometime soon? We certainly hope so.

Disclosures

This material is prepared by Henry James International Management and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information and opinions contained in this material are obtained from proprietary and nonproprietary sources believed by Henry James International Management, to be reliable, are not necessarily comprehensive and are not guaranteed as to accuracy. No warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions is accepted by Henry James International Management, its officers, employees or agents. This material is based on information as of the specified date and may be stale thereafter. We have no obligation to tell you when information herein may change. Reliance upon information in this material is at the sole discretion of the reader. Certain information contained herein may constitute forward-looking statements. Estimates of future performance are based on assumptions that may not be realized.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Any indices chosen by Henry James International Management to measure performance are representative of broad asset classes. Henry James International Management retains the right to change representative indices at any time.

Henry James International Management and its representatives do not provide legal or tax advice. Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation.