Last week volatility and values in equity markets reached levels last seen in April. The large jump in coronavirus cases has led to lockdowns throughout Europe and the UK causing equity markets to fall. There is optimism that there will be announcements around the availability of a vaccine, but it is unlikely that this would be readily available until sometime next year.
Given the continued threat due to the coronavirus and the general economy, we have decided to make a few changes to our asset allocation. We have reduced our allocation to the UK and Europe as there are continued uncertainties due to both the coronavirus and Brexit. Across England a new national lockdown will come into force for at least one month from the 5th of November. This is likely to further slow any economic recovery. To mitigate the impact, the furlough scheme will be extended until the end of December to aid firms paying absent staff. The Bank of England will also be issuing a further £100bn in bond purchases to support the economy with cash over this next lockdown period. Although there is still hope that a Brexit deal will be reached, one has not yet been announced. The Eurozone has just entered its third consecutive month of deflation and with curfews and lockdowns announced across many European countries confidence and activity are low. It looks unlikely that they will be reaching their GDP growth target of 3.1% in the fourth quarter. Further stimulus in the form of further bond purchases is likely to be on the way.
Although Japan has had a slight increase over the past few months, with continued volatility we believe that growth is more likely from international funds, the Pacific, and the emerging markets, specifically China. The countries which make up the Pacific and China have been the most effective in dealing with the coronavirus and have had the lowest number of cases. The underlying fund prices for our international, Pacific, and emerging markets funds have also shown stronger returns and positive crossover signals.
Gold was a strong performer immediately after the drop in market values, but it has also been extremely volatile. Both physical gold and gold mining unit trusts has been on a downward trend since its high at the beginning of August. We have decided to again reduce our gold allocation.
We have kept our current allocation in the US funds. Although the results of presidential elections are hard to predict, the record-breaking early voting numbers are expected to favour Biden and the Democrats. If Biden wins, his ‘Build Back Better’ platform for economic recovery is expected to create a greater boost to the economy than a Republican win. His ambitious economic plan includes £2tn for green energy and infrastructure projects, broader benefits for social security, health care, and a more highly skilled workforce. The large amounts of government and monetary stimulus helped the initial recovery, and it appears that the Fed will continue to provide support.
On top of the changes to our asset allocation, the trend-following signals are still recommending being partially out of the UK and also starting to signal to be out of Europe. Based on this, we have further reduced our allocation to the FTSE All Share funds and have left the FTSE 250 allocation at its current reduced amount. We have also reduced our European allocation from our new default amounts. These temporarily reduced allocations due to the trend-following signals have instead been moved to some of our bond funds and also cash to add a bit more stability.
As always, the objective of our Guardian portfolios is to protect investments. These modifications in our asset allocation are designed to add growth and protection from poorly performing regions while our trend-following decisions aim to add protection from loss.