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Q4 decline in Europe fears on further lockdowns

5 November 2020

Global equities have reacted negatively to the resurgence of infections in the UK and Europe, with growing fears that the latest Government restrictions will cause a renewed decline in Europe in the fourth quarter, says Rupert Thompson, chief investment officer at Kingswood.

Markets tumbled 7% from their September high in Early November, although they remained 40% up from their March low. However, third quarter Eurozone and US GDP remained 4.3% and 3.5% respectively down on the end of last year, with the UK also on course to announce lower figures.

Thompson says: “The UK has been one of the economies worst hit by Covid and remains one of the most vulnerable. Even though Rishi Sunak has now reinstated the more generous furlough scheme, the lockdown risks reducing GDP by a hefty 5% or so in the fourth quarter.

“The US also looks likely to see growth suffer over coming months with inflections climbing sharply and the government response chaotic. Only in China is Covid already beginning to seem like a distant nightmare with GDP up 4.1% this year.”

However, Thompson said that while the next few months could see further market weakness, the situation will not be a repeat of earlier in the year. The lockdowns are less severe and the hit to GDP should be much smaller, he says.

In the meantime, earnings should provide investors with one source of support.

Thompson added that the Q3 reporting season in the US was seeing earnings “coming in considerably better than expected”.

“The tech giants generally beat expectations as did the banks earlier in the month. S&P 500 earnings now look likely to fall some 10% rather than 20% as was the expectation at the start of reporting.”

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