As obvious a line as it might be, it is difficult to resist the attraction of ‘vaccine news provides a shot in the arm for markets’ as a succinct review of November, offering much-needed hope of a better 2021.
Markets had become increasingly jittery towards the end of October, with fears of Covid-19 running out of control and fresh lockdowns blunting the positive impact of a predicted victory for Joe Biden in the US. The first days of November brought the long-awaited election, which proved every bit as tumultuous as expected and initially denied markets any of the certainty they craved.
Fears of a long drawn-out melee in the US had most investors expecting another challenging month but then came news of a vaccine from Pfizer/BioNTech, with early tests suggesting it could prevent more than 90% of people from getting Covid-19. With close to 60 million cases and over 1.4 million deaths around the world, this news caused great excitement in markets, with the S&P 500 and Dow Jones quickly rocketing back towards all-time high territory. Equities were pushed through these levels later in November, and global stocks actually registered the strongest month on record, on the back of a successful trial from US company Moderna and further positive vaccine news from Oxford AstroZeneca.
While President Trump hailed the 30,000 level on the Dow Jones as a ‘sacred number’ that no one expected to see (comments delivered alongside his annual turkey pardoning), this is the ninth record for the index this year, despite the pandemic, and we would reiterate comments about the growing divergence between markets and economics. However positive the vaccine news might be, we are clearly facing some tough economic times ahead.
Such highs may be enough to tempt investors back from the sidelines but they increasingly appear to be another form of noise rather than an accurate signifier of market value, particularly given the heavy technology skew in the US. Starting back in 1896, the Dow Jones Industrial Average took more than 100 years to hit the 10,000 mark amid the tech bubble in March 1999 but just 17 years to double that and reach 20,000 in January 2017. As we can see, that third 10,000 points has come in under four years and while the proportional gains get smaller with each milestone, we would also question what this level actually represents given the obvious disconnect from what remains a very challenging economic reality.
Initial stronger performance in the ’Biden/vaccine bounce’ came from companies benefiting from the economy reopening, such as consumer and leisure sectors, while those positioned for a stay-at-home scenario did less well, including technology. What recent events have allowed investors to do is recalibrate their expectations for many companies, a vaccine ‘floor’ if you will, creating more certainty around valuations given the fact a return to normality is at least in sight.
We have also seen a pronounced value spike – positive for our portfolios given the slight value tilt – but predicting a sustained resurgence for this part of the market has often proved the kiss of death in recent years. As ever, we are cautious about extrapolating short-term data into long-term outcomes – even given the largest one-day crash in momentum stocks in history over the month – but there are undeniably encouraging signs. Exhibit one for the value case is Biden’s expected infrastructure programme and the ‘Green Industrial Revolution’ in the UK, which could be positive for sectors such as industrials, materials, consumer discretionary and – with a potential knock-on impact on bond yields – financials.
Despite long-awaited rays of light in November, the month also brought sobering economic news in the shape of Chancellor Rishi Sunak’s Spending Review, suggesting persistent scars from Covid-19. The Office for Budget Responsibility (OBR) has forecast the UK economy will contract by 11.3% in 2020, the biggest decline in more than three centuries (since the Great Frost of 1709), then grow by 5.5% next year and 6.6% in 2022 before settling around the 2% level for 2023-25. As would be anticipated with so many businesses either closing or forced to shed staff, unemployment is predicted to rise to 2.6 million by the middle of next year and debt to reach 97.5% of GDP by 2025-26, with something like £330 billion spent to get the country through Covid-19.
All of this should give some pause, at least, in the face of increasingly bullish predictions for UK equities in 2021, although the market is cheap compared to the rest of the world and there will be clarity on Brexit for the first time in more than four years, for good or ill. We rank asset classes from one to five (five being most bullish) and have moved up to a four on the UK during this year; to compare, we remain a two on the expensive US but are more positive on the five-ranked Europe, Japan, Asia and emerging markets.
Turning to the US, the election was far closer than expected again and the swing suggested by the Electoral College was much less marked in the popular vote, showing a 52/48 split in favour of Biden. Although he is now President Elect and already choosing his cabinet (including former Fed chair Janet Yellen as Treasury Secretary), we have the unedifying situation of Trump refusing to concede, claiming fraud and continuing to push legal challenges. Social media has taken the unprecedented step of tagging these claims with a note to say they are disputed but there is little to suggest someone who can claim ‘DEAD PEOPLE VOTED’ will go quietly.
Experts say Trump has no chance of reversing the result but his team has made up to 30 legal challenges so far, with most of these already denied, dismissed, settled or withdrawn. More worrying is the growing sense of a scorched earth approach to his final days in office, with suggestions the President had to be talked out of a strike against Iran’s main nuclear site.
When we can look past the 45th President towards what 46 can offer, signs are that the divided government of the last four years will continue, with Republicans retaining the Senate and Democrats the House, albeit with a reduced majority in the latter. The caveat to this is that runoff elections for Georgia’s two Senate seats are required in January as no candidate was able to achieve a majority. If either of the incumbent Republicans, Kelly Loeffler and David Perdue, hold their seats, the party will maintain its majority control in the chamber. If challengers Jon Ossoff and Raphael Warnock prevail, however, the Democrats will gain control of the Senate, bringing the split to 50/50 and giving the tie-breaking vote to Vice President-Elect Kamala Harris.
Should a divided Government persist, as we expect, there are pros and cons. On the pro side, it obviously means checks on the President and little chance of reversals to market-positive measures such as Trump’s tax cuts; on the cons, any changes to legislation will likely take a long time to be enacted, which is far from ideal given the urgent action required as Covid cases continue to rise.
Given the invigorating effect of vaccine news on markets, it is little surprise to find improving sentiment among investors. In the latest edition of the monthly Bank of America (BofA) Fund Manager survey, figures revealed falling cash levels among professional investors and a net 46% of asset allocators overweight equities, the highest level since January 2018. This saw an increase in exposure to small caps, emerging markets and value, and emerging markets is the asset class most believe will outperform in 2021, ahead of the S&P 500, oil and gold.
Technology continues to be seen as the most crowded trade – and all of these show views shifting towards our long-term thinking. Two-thirds of investors now claim the global economy is in the ‘early cycle’ phase, not recession, and 91% believe it will be in a stronger position in 12 months. Striking a more restrained note, BofA added that while it expects a rotation towards cyclicals after positive news on vaccines continues through Q4, investors should ‘look to sell the vaccine as we think we are close to full bull’.
For our part, we always want to prepare rather than react and believe our calls earlier in the year to add small caps, Asia and emerging markets are starting to bear fruit. Despite the Biden effect in the US, we still have concerns about narrow market leadership and believe tech companies could face further corrections, even without crushing Antitrust regulation. As stated, we expect the divided government to continue and that could mean stimulus to combat Covid-19 is slower to come than needed; on the other hand, Biden promises a return to more traditional centrist politics and a calmer approach to international relations, which should be positive for China and Europe after years under the shadow of trade wars.
Please remember that past performance is not a guide to future performance and the value of an investment and any income generated from them can fall as well as rise and is not guaranteed, therefore you may not get back the amount originally invested and potentially risk total loss of capital.
This document should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice.