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Hedley Market Commentary - October 2020

Market Commentary – October 2020


By Neil Worsley, Investment Strategist

It has not been a good year (or a good decade) for global banks. The MSCI World Bank Index is trailing the MSCI All-Country Index by 34% year to date. Today, banks make up just 3.5% of the market capitalisation of the overall index, down from 11% pre-financial crisis. The pain is being felt around the globe. Citigroup has fallen 47% in 2020 and now trades on half its book value. HSBC is only just above its 25 year low. The latest weakness came from a report by the International Consortium of Investigative Journalists that lenders had facilitated $2 trillion in suspicious transactions. A second round of stress tests later this year is also weighing on stock prices, the results of which may help determine whether they can resume buybacks and dividends. Clearly, many investors have now given up on this sector and who can blame them, after all the regulatory tightening and now with the Covid 19 impact and zero interest rates taking their toll: However, the world still needs a viable banking system to function appropriately as without this economic growth will stagnate. The regulators have taken every opportunity over the past decade to penalise the sector but the recent easing of bank regulation in Australia may just be the first sign that this has gone far enough.


Investors are now beginning to focus attention on the upcoming Presidential election. As I write this, and following the 1st Presidential debate, Joe Biden has taken a 14 point lead nationally over Donald Trump. Meanwhile, Biden has at least a slim lead in polling averages of several states that will determine who wins the election, including Pennsylvania, Michigan, Wisconsin, and Arizona. Surveys also show tight races in Florida and North Carolina. President Trumps coronavirus diagnosis and subsequent hospitalisation have now injected more uncertainty into the race: But does the outcome really matter as far as investors are concerned? The chart below indicates the impact on 12 month stock market returns in the US following an election. The results are interesting in that there is really little difference to shareholders, whatever the outcome; of course it may well be different this time around and with the challenging economic backdrop the person in the White House may certainly make more of a difference this time.


Finally, Goldman Sachs have issued a chart which suggests that the expected US election day volatility in US stocks could be up to 2.8%. This does not seem so significant in terms of what we have witnessed in recent months and almost feels like a ‘normal’ event move in many respects.


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