The week of 2 November saw sizeable gains for equities as investors reacted to the prediction of a split vote, in which the Democrats’ agenda would be held back by a Republican-controlled Senate. This led to a bump in US equity markets, which spilled over into global gains.
The US election was undoubtedly the main news event of the week. After four tense days, and a much closer-than-expected result, the presidential election’s projected outcome was for a Joe Biden win1. Trump has yet to concede and the legal challenges and recounts have resulted in uncertainty. While none of the challenges are likely to shift the overall outcome, given the number of votes in multiple swing states by which Biden is ahead, the rhetoric could continue until 14 December when the Electoral College formally votes.
Attention will now turn to the two outstanding Senate races in Georgia. Voters have until 7 December to register for a vote on 5 January 2021 to determine whether the Democrats can overtake the Republicans’ 50 projected seats and control the Senate for the next two years1. As things stand, however, the most likely outcome is that the Democrats will fall short and not be able to follow through on their promised changes, despite retaining a majority in the House of Representatives and picking up the presidency.
A divided government means an initial lower government stimulus package, but it also reduces the likelihood of significant changes in healthcare, regulation and taxation2, all of which are disliked by markets.
This election news overshadowed the US jobs report for October, released on Friday 6 November, which saw jobs rise by more than expected and the unemployment rate fall for the sixth consecutive month to 6.9%3. Meanwhile, as expected, the US Federal Reserve (Fed) kept its range of interest rates unchanged at 0-0.25% and maintained bond purchases at US$120 billion per month. For the second meeting in a row, the Fed Chair, Jay Powell, stressed the need for further economic support2. While a deal is anticipated before the end of the year, its generosity has to be negotiated between Congress’s dual leadership, split across the House of Representatives and the Senate.
As markets shifted back to focus on the virus, as well as a potential vaccine, an announcement on Monday 9 November saw the BioNTech and Pfizer vaccine deemed to be 90% effective2 by independent analysis. With initial doses potentially available before year end, more good news is expected as 12 more vaccines are currently in phase-three trials. Of these, six have already received limited approval for use, albeit without the benefit of independent analysis.
While a comprehensive rollout of any new vaccine will take time, this is extremely positive news as COVID-19 cases continue to rise4. This second wave shows that the only way to contain the virus is with a vaccine – hence the jump in markets.
The week of 2 November also saw the release of the October purchasing managers’ index data from around the world5. On balance, these tended to be more optimistic on the state of the economy than expected, but as they report on October, i.e. before the latest lockdowns, they do not reflect the current reality.
Finally, the Bank of England left interest rates unchanged at 0.10%, but voted unanimously to increase its asset purchases by a further £150 billion5, above the £100 billion consensus expectation. At the same time, the UK government also unveiled further support, with the furlough scheme extended until 31 March 20212. This pays workers 80% of their salary for hours not worked.
The astonishing week for markets saw the MSCI All Country World Index end +7.60% in US Dollar terms, and +5.87% in Sterling terms.
US optimism (+5.89%) was picked up by other markets – some of which were even more ebullient – with Europe (+7.59%) and the UK (+5.92%) outperforming and Asia (+4.30%) and Emerging Markets (+4.90%) lagging.
Sector-wise, all sectors were in positive territory, although information technology (+7.70%) and healthcare (+6.89%) stood out as investors saw the projected split in Congress mitigating the risk of the Democrats increasing regulation, lowering drug prices and threatening the break-up of leading technology companies. At the other end of the spectrum, energy (+2.11%) was the weakest sector, given the oil price still faces demand-supply worries.
In terms of style, large capitalisation (+5.86%) and growth (+7.22%) stocks outperformed their small capitalisation (+5.00%) and value (+4.30%) counterparts.
The positive performances in equity markets flowed through to our positions, with Dodge and Cox Global Stock, Nedgroup Global Equity and TT Emerging Markets Equity all gaining in excess of 8%.
In bond markets, the unusual combination of government bond yields falling and credit spreads tightening also led to a solid week in terms of the performance of our bond holdings, with our strong US bias also supportive.
Our property investment trusts followed equities higher, while the vaccine announcement supported our healthcare managers, given the talk that their care home residents will be first on the list to get a vaccine when one becomes available in the UK. This complements their safe yield of around 6% given their long inflation-proofed leases and non-cyclical profiles.
Meanwhile, the GCP Asset Backed Income book continues to look solid, with no credit issues. The managers reported that all expected interest and principal repayments had been made on time, without exceptions.
The focus is likely to remain on the virus, vaccines and the pandemic’s impact on economic activity. And while the latest update on the US consumer price index will be scrutinised, it covers October and, together with the last earnings results’ numbers, means the numbers are already seen as outdated.
It is also likely to be a crucial week for Brexit trade negotiations since these have to be wrapped up by mid-November to allow time for a deal to be ratified in Europe before 31 December. While progress is being mooted by both sides, significant issues remain around the UK being able to deliver a level playing field, without having to automatically adopt new EU legislation, and increase its fishing rights – both seen as issues fundamental to the UK’s stance on sovereignty.
Finally, there is a European Central Bank (ECB) forum on Thursday 11 November featuring the ECB President, Fed Chair Powell and the Bank of England Governor.
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Sources: Nedbank Private Wealth and (1) fivethirtyeight.com; (2) Reuters; (3) US Department of Labor; (4) John Hopkins University; and (5) Bloomberg.
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