As we head into the final quarter of the year, there seems to be a strong desire to get 2020 over with. During a few nailbiting weeks in which the UK and EU will need to agree a trade deal, the Q3 reporting season will also tell us how companies fared after most economies came out of lockdown and we will have the US presidential election in November.
The UK’s aggressive attitude in recent talks means that a full trade deal looks hard to achieve but there are also signs that some sort of compromise will be reached, even if any agreement could be a long way from perfect. A failure to agree at least something on amicable terms would be a blow to the UK as it is also suffering from rising infection rates, a weak economy and a distinct lack of confidence among international investors.
At least house prices are still going up! The UK is at risk of being labelled a disaster zone and Boris Johnson’s plan to turn the seas around the UK into a wind farm by 2030 didn’t change the impression that he has lost much credibility since he was elected.
Nonetheless, it is good to see that someone is thinking of the future and there is a growing chorus of commentators who see long term value in British assets, whose valuations have lagged those in other countries but which now at least mean there is a more attractive risk/reward trade off.
The earnings season will almost certainly be a more bullish affair than is currently predicted, as companies and analysts play their time-honoured game of ‘beating’ deliberately conservative forecasts, but the Swiss bank Julius Baer reports that US corporate earnings will be down 21% against the same period last year, according to consensus, which follows Q2 when earnings were down 31%. In reality, there is a chasm between the business performance of those sectors that are negatively impacted by the virus and those that have benefitted from lockdown and hype surrounding a potential cure. However, in many cases I’m sure companies will be highlighting their most positive figures, namely those that show a strong rebound from the low point of Q2 when many things were closed completely, and the effect might be to juice markets even more.
Finally, the US election is looking like it is going to be a nightmare. If on election night it looks like Biden is winning, Trump will refuse to accept the result, he will say it is rigged and will send it to the supreme court for a decision, where he is in the process of shifting the balance of power towards Conservative judges. He is also likely to claim victory before mailed-in votes are counted and is almost certainly going to refuse to accept them as valid. This will work in his favour because more Republicans are expected to vote in person (and will be counted almost immediately) whereas more Democrats are expected to post their vote, which would need counting later. In fact, it looks like the Democrats are going to struggle to take power regardless of what happens, even if they get more votes, now that Donald Trump has called into question the validity of the whole democratic electoral process. Unless he wins, of course, in which case it will be declared valid.
The potential for a political stalemate that endures for weeks is real, maybe even a coup, and the subsequent volatility threatens to increase the already-wide divide that exists in America today, which does not provide a stable foundation for investment decisions. The final few months of 2020, as well as potentially the first few months of 2021, promise to be challenging.
PHOTO: Joe Biden