Market and Economic review for week ending 27 November 2020
At present, we have small overweight’s across UK, Europe, US, China and Asia equities. A small UK REITs position continues to be held across all the Risk Managed Active and Passive portfolios as long-term valuations look attractive. We are monitoring potential risks to markets, which include disappointment on the vaccine rollout, an increase in inflation expectations, and the end of the UK’s Brexit transition period in December.
Market and Economic review
This week began with a rush of excitement, driven by a tripartite of bullish releases.
First, AstraZeneca announced positive news regarding its COVID-19 vaccine trials. Co-developed with Oxford university, the vaccine – which showed efficacy up to 90% and does not require complex refrigeration – is expected to be submitted for regulatory approval imminently. Later in the week we learned that irregularities in Astra’s testing methodology may make it harder to secure swift approval in the US, but nevertheless it represents a step forward in the fight against the virus.
Second, outgoing US President Trump acquiesced to requests from the incoming regime to begin handing over. This is fairly typical of the US government machine, but had been held up by a lack of engagement from the Trump camp. It gives President-elect Biden access to the Presidential Daily Brief as well as clearance to work with key government officials and tap millions of dollars in funds as he prepares to take over on 20th January.
The third sentiment boost, linked to the second, was confirmation that former Fed Chair Janet Yellen is poised to become US Treasury Secretary under Biden. Well known as a policy dove, and likely keen to cement the symbiotic relationship between the Federal Reserve and the US Government, Yellen’s appointment would likely smooth the way for the significant investment plans pledged by Biden and Harris during their political campaign. In naming John Kerry as Climate Change Envoy, Biden has already set out his position on the Climate Emergency. Kerry was instrumental in the formation of the Paris climate agreement and it would be unsurprising to see the US re-join the fold early in Biden’s Presidency. As a signal to climate change deniers and corporate sceptics, this would represent the end to the US’ somnambulistic shuffle towards oblivion.
The performance of risk assets was strong this week, as developed market equities outperformed emerging markets and the US Value index outperformed Growth. To date, and adjusted for sectoral differences, the Value factor has yet to mount a convincing rally against Growth, with most of the recent outperformance driven by a bounce in bombed-out sectors. US government bond yields rose modestly – predominantly at the long end, perhaps discounting larger amounts of future borrowing under the Democrats. Corporate spreads continued to grind tighter, particularly in Europe (-15bps) and the US (-30bps). In currency markets, the US dollar experienced another week of depreciation against major trading pairs as the appetite towards risk taking improved.
Amid the myriad economic data released this week, Europe’s PMIs came in broadly in line with expectations. Areas of strength included Germany, where both Manufacturing (57.9) and Services (46.2) beat analysts’ estimates, while France’s equivalents displayed continued contraction in both components (49.1 and 38.0 respectively). Across the Channel, the UK’s November Manufacturing PMI reading was considerably better than expected (55.2 vs. 50.5 forecast). However, continued weakness in Services, which drives UK GDP, dragged the composite below 50.0 for the first time since June. This gives a downward bias to economic growth expectations, confirmed later in the week when UK Chancellor Rishi Sunak announced that UK borrowing was forecast to hit a peacetime record of £394bn in 2020 and that 2020 GDP was likely to shrink by 11.3%. The OBR expects unemployment to hit 7.5% in Q2 2021 – compared to 4.8% today – as pandemic support packages roll off. In a bid to replace lost funding when the Brexit transition period ends, the Chancellor also announced a new National Infrastructure Fund alongside support for lower income cohorts through a 2% rise in the living wage. Teachers, police, and civil servants are likely to see their pay reduce in real terms, partly to help fund increases for doctors and nurses. While Sunak attempted to contextualise this against the private sector, where job losses were significant and were likely to get worse, this is unlikely to win the chancellor any popularity contests.
U.S. consumer confidence fell more than expected in November likely as a widespread surge in new COVID-19 infections and business restrictions outweighed encouraging news on vaccines. The Conference Board's consumer confidence index dropped to a reading of 96.1 from October’s 101.4. The second reading of US Q3 GDP came in line with the first at 33.1% annualised, alongside a 27.5% rebound in corporate profitability over the same period. Personal incomes fell 0.7% in November, compared to forecasts of no change.
The events of this week provide additional support to our constructive view of the economic outlook and its implications for asset prices. Central bank support continues to operate alongside government fiscal packages and the ECB minutes released this week suggest further support is still likely in December. Market confidence appears predicated on a continuation of both of these facets, at least until an economic recovery is more assured. The prospect of an incoming US administration keen on fiscal stimulus and infrastructure investment should be a marginal positive contributor to this, given its support for longer term growth prospects.
The increased chances of delivering a COVID-19 vaccine within a reasonable timeframe continues to salve markets even when there is volatility in case numbers. As we look forward to 2021, our inclination is to maintain diversification across overweight positions in regional equity markets, accepting that some closing in the valuation gap between the outperformers of 2020 and the laggards is likely to be a bumpy journey.
T&IO Weekly Market Update Podcast
Mark Riggall, Head of Client Portfolio Management at T&IO talks through this weeks latest market developments and T&IOs current outlook.