The biggest themes for the week of 9 November, and the month so far, have been the US elections and the encouraging news about pending COVID-19 vaccines. The resultant bounce in equities, however, focused on countries, industries and investment styles that have typically lagged year-to-date.
In the US, markets initially responded well to the news that the Democrats would need to win both Georgia Senate runoffs in January1 in order for a Biden administration to be able to vote anything through the Senate and push forward its agenda. As we mentioned last week, this has been well received as it reduces the likelihood of significant changes in healthcare, regulation and taxation1, changes which are disliked by markets.
However, this uptick was later tempered by the intelligence1 that Trump – in addition to refusing to acknowledge the election results – is stepping back from stimulus negotiations. This was received negatively as the (Republican) Senate Majority Leader, McConnell, is likely to pass a far smaller level of economic support than the White House would.
And while the news on new virus cases continued to cause concern – not least as the US has reported over 100,000 daily cases numerous times and countries in Europe also continue to report large increases – there were further developments on the vaccine front. In addition to more news on the Pfizer vaccine, Moderna has reported its vaccine has proved to be 95% effective in its trials2, bringing with it the hope that the vulnerable in society could start being vaccinated before the end of the year, including some in the UK.
The discussions around the level of any economic stimulus in the US will also be influenced by the recent release of positive local economic data, for example, the drop in the weekly initial jobless claims3 to a pandemic low of 709,000. Nevertheless, the economic outlook remains uncertain as highlighted by the flat consumer price index readings3 from the country for October. These undershot market expectations, and showed inflation to be further behind the Federal Reserve’s target than hoped.
In Asia, meanwhile, the lack of US leadership in the region and global trade relations was underscored by the signing of the Regional Comprehensive Economic Partnership1. Marking the world’s largest regional free-trade agreement, it covers nearly a third of the global population and the economic output of 15 nations including China, Japan, South Korea, Australia, New Zealand and the 10 countries in the Association of Southeast Asian Nations. In particular, the deal is likely to favour China. The world’s second largest economy2 already saw October industrial production up +6.9% and retail sales up by +4.3% – the fastest annual increases seen this year – and this agreement does not involve a key rival in India, which withdrew from the talks in 2019, or the US.
In Europe, markets responded well to the announcement that the European Council and European Parliament may be closer to reaching an agreement regarding the €1.8 trillion long-term budget2, which includes the funding for the €750 billion recovery fund, despite moves by Hungary and Poland.
The bloc is also hoping for an agreement with the UK with regard to Brexit. Although another week of negotiations went by with little progress made in the two main areas of disagreement, given it is now the middle of November and next week sees a European Parliament plenary session, we may now have reached the latest point for both sides to agree a deal – prompting a final push. Any agreement could also be put to EU leaders as they meet via video conference on Thursday 19 November.
Any news of a deal would also be well received in the UK. While the recent gross domestic product (GDP) reading for Q3 showed a record +15.5% expansion, it does not reverse all of the losses encompassed in the record -19.8% contraction in Q2. Further to this, economists expect there to be another contraction in Q4, following the latest lockdown restrictions put in place by the UK government, which could lead to a recession if a no-deal Brexit takes place, economic activity does not pick up and two negative quarter of GDP readings.
Within equities, the MSCI AC World Index was up +2.26% in US Dollar terms, and 2.00% in Sterling terms. As mentioned before, we saw a degree of rotation within equities – at all levels – as this year’s laggards saw performance catch up a little.
At the market level, the UK (+7.45%) and Europe (+3.84%) led, while Asia ex Japan (+0.55%), underperformed.
At the sector level, the sectors that have struggled – energy (+12.87%), financials (+7.20%) and real estate (+4.56%) – outperformed, while the sectors that have withstood much of the fall out – information technology (-0.6%) and consumer discretionary (-1.11%) – were bottom of the pack.
In terms of style, value (+5.38%) outperformed growth (-0.80%). This meaningful rise in value was probably overdue given that, even with a recovery, value still trails growth by a 30% margin year-to-date.
The performances across equities carried through to our portfolios and, as such, Dodge and Cox Global Stock benefitted, while Fundsmith Equity and Morgan Stanley Global Brands marginally underperformed. Nedgroup Global Equity also had a solid week, helped in part by the continued recovery of some of its more economically sensitive holdings – such as Airbus (the aircraft manufacturer) and Safran (a supplier of aircraft parts). Overall, our equities have fully participated in the run we have seen in November as at the time of writing.
Within bond markets, safe-haven government bonds came under pressure, and a narrowing of credit spreads saw corporate bonds supported.
Property securities also outperformed and, while the focus for the market was on lower quality which rallied the most, the more defensively-positioned Nedgroup Global Property remains a full 8% ahead of its benchmark year-to-date. And while the BMO Commercial Property Trust also saw a bounce, it still has the potential to recover more in our view, notwithstanding the clouds hanging over regular commercial property, especially in the retail and office sectors.
In terms of portfolio changes, we completed an investment in Round Hill Music Royalty Fund, which aims to complement our holding in Hipgnosis. The Guernsey domicile supports its inclusion in all client portfolios, and while the manager fell short of its capital raise target, the US$282 million raised will be enough to achieve its aims.
Finally, we also received positive information on the 3i Infrastructure Fund, which has deservedly risen in value following recent results and since the low interest rate environment prompted the team to refinance some of its long-term borrowings at improved rates.
Attention for the week of 16 November will remain on the coronavirus, its spread and what that might mean for economic activity, as well as the possibility of further restrictions.
The US releases an increased amount of hard economic data for the month of October, including retail sales and industrial production.
Finally, earnings season is nearly over, with 444 of the S&P 500 companies having now reported. Of these, 84% have reported a positive surprise on earnings and 72% have reported a positive surprise on sales.
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Sources: Nedbank Private Wealth and (1) Reuters; (2) Bloomberg; and (3) US Department of Labor.
The value of investments can fall, as well as rise, and you might not get back the original amount invested. Exchange rate changes affect the value of investments. Past performance is not necessarily a guide to future returns. Any individual investment or security mentioned may be included in clients’ portfolios and is referenced for illustrative purposes only, not as a recommendation, not least as it may not be suitable. You should always seek professional advice before making any investment decisions.
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