Markets have gone through another broadly positive quarter as investors continued to allocate to risk assets despite the ongoing coronavirus pandemic. 
However, the returns of 2020’s third quarter were lower than those realised in the previous quarter, as nervousness grew around events such as a potential second wave, Brexit and the US presidential election impacted sentiment.
Below, Trustnet gives an overview of markets during the third quarter, looking at returns by asset class, geography, investment style and a range of other viewpoints.
Asset classes
Equities were the best performing asset class of the quarter with global stocks (represented here by the MSCI AC World index) posting a total return of 3.35 per cent in sterling. This is somewhat down from the 19.64 per cent gain of the second quarter.
Despite the unprecedented nature of the coronavirus pandemic and the economic hit it created, equities have powered ahead since their lows in March thanks to the trillions of dollars that have been spent globally on monetary and fiscal stimulus.
Source: FinXL
However, the stock market rally slowed towards the end of the quarter – the MSCI AC World rose just 0.23 per cent in September, while government bonds gained more than 4 per cent as investors sought out safety.
Rupert Thompson, chief investment officer at wealth manager Kingswood, said: “As to the cause for the latest weakness, it is all too obvious – namely the second wave of infections being seen across the UK and much of Europe and the local lockdowns being imposed as a result.
“All said and done, equity markets look set for a choppy few weeks. Further out, however, we remain more positive – not least because the focus should hopefully switch from the roll-out of new lockdowns to the roll-out of a vaccine.”
Geographies
The MSCI Emerging Markets index was the strongest of the five regional markets we look at here, making a total return of 4.71 per cent over 2020’s third quarter.
Emerging markets have held up better than the developed world over the coronavirus crisis, largely thanks to Asia’s prompt response in dealing with the outbreak. The IMF predicts that emerging economies will contract by 3 per cent in 2020, which looks robust when put next to the developed world’s forecasted 8 per cent fall; China is tipped for 1 per cent growth this year, against the US’s 8 per cent contraction.
Source: FinXL
The UK made the weakest total return of the five indices, with the FTSE All Share index sliding almost 3 per cent over the quarter.
Not only is the country dealing with the start of a second wave (which comes after a lacklustre handling of the first wave) but is approaching the deadline for Brexit with slow progress being made in its negotiations with the EU.
Investment style
The third quarter was another good period for momentum investing, or using an investment strategy that seeks to capitalise on the continuance of an existing market trend. The MSCI ACWI Momentum index was up 8.31 per cent over the period.
The growth and quality investing styles weren’t too far behind. Quality-growth investing, which was in favour for much of the post-financial crisis bull market, has continued to outperform during 2020’s coronavirus crisis as investors looked for stocks that can hold up in a low-growth, low interest rate environment.
Source: FinXL
Value investing, however, continued to fall far behind with the MSCI ACWI Value index making a slight loss over the three months under consideration. Value stocks have been out of favour for an extended time, as macroeconomic conditions have been more suited to growth and quality investing.
Samuel Bentley, client portfolio manager at Eastspring Investments, said: “While the future is inherently uncertain, we believe that the extreme gap between value and growth stocks will not be sustained over the long term.
“Investors are pricing in an extremely optimistic future for stocks with short-term earnings growth and stability, while pricing in extreme pessimism for more cyclical stocks. We do not know when this contradiction ends, but when it does it will likely see an aggressive correction in the relative valuation of value and growth stocks.”
MSCI industries
While tech stocks have been among the undisputed ‘coronavirus winners’, the third quarter offered some signs that the sector is not all dominant. Having posted a gain of more than 30 per cent in the previous quarter, the MSCI AC World Information Technology index made 7.70 per cent in the third quarter and was overtaken by consumer discretionary stocks.
There were several days during the quarter when tech stocks fell dramatically, with US mega-caps like Apple, Tesla, Microsoft and Amazon being hit with heavy falls. This caused some to question if the tech bull run is coming to an end, but analysts argued that the sector continues to look attractive.
Source: FinXL
At the time of the tech sell-off, The Share Centre investment research analyst Helal Miah said: “The big question is whether this is just a mini correction or something more significant. A more material correction may be on the way but I am inclined to think that this is just a modest and healthy adjustment, the main reason being that nothing has fundamentally changed in the last few days.
“Investors still have limited options for returns on their capital, traditional income stocks have been battered with reduced payouts, while the tech sector offers some hope for longer-term growth and have actually proven to be defensive during this crisis.”
FTSE market cap
Looking at UK stocks from a market cap point of view, AIM was the best performing segment after a total return of 8.78 per cent. It’s important to point out that this is down from the 29.74 per cent rise in AIM stocks witnessed during the second quarter.
The quarter’s worst result came from the FTSE 100. The UK’s blue-chip index held better than other parts of the market during the initial coronavirus sell-off, but has recovered much more slowly as investors looked towards small- and mid-caps.
Source: FinXL
In a recent interview with Trustnet, ASI UK Smaller Companies manager Harry Nimmo said the rally in AIM stocks appears to have been overlooked given the poor performance of the rest of the markets. Nimmo has around one-third of his portfolio in AIM companies.
“Year-to-date, AIM stocks have done around 20 per cent better than the listed stocks [on the main market],” he said. “And I think that a lot of people have completely missed that.”
Fund sectors
Turning to the performance of the Investment Association fund sectors and FE fundinfo data shows the best performing equity sector in the third quarter was IA European Smaller Companies.
The average fund here made an 89.29 per cent total return over the period, led by JPM Europe Dynamic Small Cap (14.74 per cent), JPM Europe Smaller Companies (13.82 per cent) and Jupiter European Smaller Companies (12.85 per cent).
Source: FinXL
UK equities weren’t a complete dead-end over the three months as the IA UK Smaller Companies sector was up 5.11 per cent. But the two worst-performing equity sectors were IA UK Equity Income and IA UK All Companies with respective losses of 3.22 per cent and 0.95 per cent.
When it comes to fixed income, the modestly risk-on environment of the third quarter meant that IA Sterling High Yield funds came out on top with an average gain of 3.25 per cent.
Lord Abbett High Yield was the peer group’s strongest performer with a total return of 5.60 per cent, followed by Man GLG High Yield Opportunities (5.18 per cent) and Barclays GlobalAccess Global High Yield Bond (4.57 per cent).
Source: FinXL
Fixed income sectors focused on UK government bonds and emerging market debt posted losses over the quarter. However, September’s more challenging conditions did mean that gilts rallied and were the best performers for that particular month.
The remaining Investment Association sectors – which are home to multi-asset and more specialist strategies – were led by IA Technology & Telecommunications. Although some heat came out of tech stocks towards the end of the period, they still posted decent gains for the whole quarter.
T. Rowe Price Global Technology Equity was the sector’s best performer after rising 11.84 per cent. AXA Framlington Global Technology and Aberdeen Standard SICAV I Global Innovation Equity followed with respective total returns of 9.33 per cent and 8.65 per cent.
Source: FinXL
The property sectors continued to suffer, largely due to the impact of coronavirus and social distancing on commercial property.
Weaker returns were also made by more cautious sectors like IA Targeted Absolute Return and IA Mixed Investment 0-35% Shares as equities outperformed bonds and investors were willing to embrace more risk.