As to be expected, the ongoing and dominant economic and market theme remains Covid-19. With Covid present, no quarter will be quite like the previous one.
While Q1 was a period of steep decline and pain, Q2 was sharp recovery and euphoria, while in Q3 markets took a slightly more subdued, albeit with a positive direction. Accommodating monetary and fiscal policy kept markets happy.
Global stocks gained in Q3 but regional performances diverged, with Asia and the US outperforming Europe and the UK.
Government bond yields were little changed but corporate bonds enjoyed a positive quarter. As we noted last quarter, government and central bank stimulus are playing their part, while ultra-low rates on cash and bonds mean some investors are forced to take additional risk, which may be more supportive of higher stockmarket valuations.
US stocks gained in Q3, but struggled across September amid a resurgence of Covid-19 cases and political fighting over refreshed fiscal stimulus measures.
Worries also grew over the language used regarding a smooth transition of power if President Trump loses his re-election bid. Consumer discretionary areas, such as restaurants and appliances or apparel retailers, performed well.
Distribution companies were stronger and helped lift the industrials sector, while several airlines still facing headwinds from languishing passenger numbers offered slightly positive returns. Energy companies remained weak on poor expectations for fuel demand.
Eurozone stocks were basically flat over the quarter. Economic data slowed over the quarter and worries took hold over sharply rising Covid-19 infections in many European countries. The energy and financial sectors saw the largest falls, while materials and consumer discretionary advanced. Automotive companies also generally fared well.
UK stocks lagged behind other regions during the quarter. This extended their year-to-date under-performance due to the market's significant exposure to stocks in the oil and financial sectors.
Performance was further undermined when UK-focused areas of the market were hit in September with the re-imposition of localised restrictions and fears about the impact of these on the UK economy. Pound strength against a weak US dollar weighed on large UK companies with exposure to international markets.
Japanese stocks performed strongly, with the Topix Index recording a 5.2 per cent total return. This was despite a gradual strengthening of the yen against the US dollar over the period. Although corporate profits are still under pressure, the earnings season which concluded in early August brought more positive surprises than many expected.
Asia ex-Japan stocks recorded a strong return in Q3, led by Taiwan, where IT sector stocks underpinned gains. India, South Korea and China all posted double-digit returns and outperformed the MSCI Asia ex-Japan index. Emerging market equities registered a robust return in Q3, aided by optimism towards progress on a Covid-19 vaccine and ongoing economic recovery. US dollar weakness proved supportive. The MSCI Emerging Markets Index increased in value and outperformed the MSCI World.
In Australia, the ASX managed a positive total return, despite some of the largest companies such as the big banks, BHP and CSL finishing slightly lower. Darlings such as Dominos and buy-now, pay-later company Afterpay powered on.
The strongest performing sectors were consumer discretionary and information technology. This seemingly still reflects stimulus and early superannuation release sloshing around the economy, while IT is still benefiting from technological changes as workplaces adapt to various Covid-related changes. Energy slumped further, as it did elsewhere across the globe.
Looking ahead, although Australia and New Zealand seem to have successfully managed the second virus wave with targeted measures to reduce local transmissions, Covid-19 continues to have widespread global repercussions.
To sum up, investors are likely to remain cautious, although the swift and sizeable Covid-19 policy response from central banks and governments has managed to cushion the economic shock and policymakers aim to build a bridge to the other side of the virus. In this regard, a sustained recovery in jobs growth as the labour force returns to work while businesses are able to reopen is key to the outlook from here.
As markets will continue to be volatile and unpredictable, getting too hung-up on what-ifs over the next few months means losing sight of the big picture. Instead, consider focusing your energy on aspects of your financial wellbeing you can control, like how diversified you are against volatility in the markets.
Seeking financial advice from a qualified adviser will help you keep things in perspective, stay calm and invested. Listen to your adviser's counsel and heed it.
• Nick Stewart is an Authorised Financial Adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver solutions.
The article is prepared in association with Mancell Financial Group, Australia. The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz