Black Swan Capital Economic Update – 3 drivers that can impact expats in Europe

As we enter the final quarter of 2020, we are reviewing the global economy and investment markets. We look back at the prior quarter and the full year to the end of September. We also look forward beyond the end this extraordinary year that I am sure everyone will be happy to see the back of.

Most importantly we cover what it means for you as an expat in Europe.

First, let’s look back. In our economic update in June 2020, we suggested there could be enhanced market volatility after the unexpected and rapid recovery in the stock markets around the world in March and April.

Since then the markets have been more volatile than usual but largely uneventful. We saw European countries reopen their cities and their economies in summer.  There were boosts to local economies as many in Europe took advantage of the sun and took ‘staycations’ in their home, or neighbouring countries. Many European national governments are now balancing the need to maintain a healthy economy with the health pressures the persistence of the virus is causing. Just this week at the time of writing we are seeing The Netherlands go back into lockdown for four weeks.

We can summarise our economic overview to one theme, one concern and three drivers:

The theme: DIVERGENCE

We are witnessing an interesting disconnect in the global stock markets this year, driven largely by coronavirus. For the first time in perhaps 20 years, we have seen a decorrelation between the stock markets of countries: the US, Germany, the UK, France etc are now no longer moving all in synch. A decorrelation simply means that the stock markets are no longer moving in the same direction at the same time. You may recall in 2008, that the major markets were highly correlated, meaning they all moved in the same direction at the same time and in similar magnitude. We are not seeing this now. Let’s look at some year to date performances as at 13 October 2020 to illustrate this:

US Dow Jones6.35%US Nasdaq52.93%UK FTSE-17.14%Germany DAX2.96%France CAC-13.45%Japan Nikkei 2256.39%Hong Kong Hang Seng-6.93%Australia All Ords-5.56%

What does this mean for investors?

It means that diversification is important in portfolio management and that it is not a good idea to chase last year’s/last month’s/ or last week’s top performer. If you are diversified across asset classes, types of investments within asset classes, currencies and international markets your exposure to any one segment of the global financial market is reduced. This reduces your risk and increases your likelihood of a steadier return in line with your long term objectives.

The concern: INDEX TRACKER CONCERNS

It is not just countries that have shown a disconnect in their returns. This is happening within stock markets. Traditional sectors that often make up large parts of an index have been underperforming whilst other sectors- technology and healthcare- have done considerably better. The problem here is that core sectors: banks, manufacturing, resources, travel, oil and gas, transportation are all substantially impacted by coronavirus. These are the sectors that dominate the indexes.

The problem is that index tracker funds and ETFs are obliged to mirror the index. In this environment when the best of the stock market is sometimes not a part of the index, there can be a big difference in returns and following an index can mean you might underperform. Index fund investments have a place, and notably can do well in markets that are recovering. It can be an inexpensive way to capture market growth. In more complex and fragmented markets they face two problems. One, that they are constrained by the index that they are following, and two, that the reactive movement of investors into index funds when markets are volatile, creates a bubble-like environment. Too many inflows matched with underperformance are the ingredients for sudden price readjustments. Think carefully about how you are investing and make sure it is aligned to your long-term objectives.

The three drivers:

The last few months of this year may well be as impactful as any in 2020. There are three potentially momentous factors:

1) Coronavirus: in the context of the northern winter in Europe and the US and preliminary signs of a second wave now. As we mentioned above, some countries in Europe (Netherlands, Czech Republic) are re-entering lockdown and other countries (France, Belgium, Spain, Italy) are tightening up and considering further measures. The real impact of coronavirus on the financial markets in the three to six months ahead are the rate of infection and mortality rate, and the progress in development of treatments and vaccines.

2) The US presidential election in November: The pundits are mixed on likely outcome and the actual impact this has on the markets could be negligible, however there are several economists watching the race closely expecting a Democrat victory to be a boost for financial markets because of the stability it is expected to bring, both US domestically and internationally. Expect more wild swings if there is a Republican victory and Trump is re-elected, or, of more concern, if there is not a clear result.

3) The UK exit deal with the EU: Will they, or won’t they? If you are an expat living in Europe with a UK bank account, you may have already been told you need to close that UK account. This is in anticipation of a no-deal Brexit. As the deadline looms the risks of a no-deal Brexit are becoming more tangible and therefore, the chances of a deal being reached, according to some economists, is greater. Likely outcomes:

a) a deal is reached and the UK exit is orderly within the context of an exit deal. This may result in the pound sterling strengthening against major currencies and a boost in the UK stock market.

b) a deal is not reached. It is predicted that this could cause the UK economy to go backwards at an additional 1% of the GPD in 2021. Along with that the currency will be expected to weaken (which may be good for British exporters, but bad if you are converting your pounds to Euros) and the stock markets in the UK might respond with a sudden dip.

In a final note, the Swiss investment bank UBS recently released its annual Global Real Estate Bubble Index. This is an in-depth analysis of which cities around the world are most at risk of a property price collapse. The European cities that were ranked as overvalued, classified as the greatest bubble risk were Amsterdam, Frankfurt, Paris and Munich. Amsterdam has been classified among the most serious bubble risks for more than three years. This reminds us that property is not always a safe or stable investment and, like stock markets or any other asset, prices can go up and down. Cities ranked high on the bubble index are considered to be overpriced and at more risk of prices falling in the shorter term.

In summary, there are a number of external factors that are likely to see financial markets remain volatile in the coming months. In general, being diversified, focusing on, and being consistent with, your long term goals in your decision making is important, and avoid reacting to short term market movements.

We advise all our clients, and all international professionals in Europe to get specific advice for their circumstances: an action that is right for one person may not be for the next.

As we said at our last economic update, we acknowledge and consider at all times that we may be wrong and in this circumstance will be happy to be wrong as it will mean markets will be more placid and positive. It is a reinforcement of the importance of diversification and a highly flexible investment position for all investors.  

At Black Swan Capital Europe, we see an important part of our job in supporting our clients to be the rational and objective consideration of market conditions. Though our focus will always be on target-based investment, we must also consider how short-term actions and environmental conditions may present risks to the longer term.

If you have questions about how recent economic, political, social and environmental events may affect your investments or how they may develop in the near future, please do not hesitate to contact us for advice at info@blackswancapital.eu,  directly to your Black Swan Capital adviser, or through our website.