Value investments again outperformed their growth peers during the week of 16 November – as they have for the month so far – in a week that was generally more positive for riskier assets than safe havens.
There was mixed news with regard to the pandemic as weekly COVID-19 deaths hit their highest levels since April in Italy and Turkey, although some places such as Germany, the UK and France have seen these numbers plateau1. Case numbers also continue to move in the wrong direction in the US, with all 50 US states reporting larger numbers than during the week of 9 November. From a positive perspective, however, Pfizer/BioNTech reported the final analysis of Phase 3 trials, which showed that the vaccine was 95% effective against COVID-19, equivalent to Moderna’s numbers, and for the elderly at around 94%2. Pfizer has now applied for emergency use authorisation from the US Food and Drug Administration.
Meanwhile, although the AstraZeneca/Oxford University results showed efficacy of around 70%, that rises to about 90% when a half dose is followed by a full dose a month later3. Furthermore, its ability to be stored at fridge temperatures for up to six months (versus the -20ºC for Moderna and -70ºC for Pfizer/BioNTech vaccines), as well as its low price, means it could become the most distributed vaccine.
Despite slightly lower efficacy, these numbers are still incredibly high versus other vaccines – especially when compared to the standard flu jab, which is around 50% effective3.
Meanwhile, the continued spread of the virus in the US has ramifications for the economy, as weekly initial jobless claims ticked up to 742,000, and up from the post-pandemic low of 711,000 on Thursday 19 November4. However, the continuing claims number – which tracks the number of Americans receiving unemployment insurance – was slightly better than expected at 6.37 million, but this may also come under pressure as many cities implement new restrictions meant to curb the spread of the virus2.
The week of 16 November also saw a weaker-than-expected reading on US retail sales, which rose by just +0.3% in October, although industrial production was up 1.1%2. Meanwhile, the Treasury decided not to extend several emergency lending facilities set up by the Federal Reserve (Fed) at the start of the coronavirus pandemic, prompting a rare expression of disappointment from the central bank5, which warned that the economy remained “strained and vulnerable”.
In Europe, on the recent EU leaders’ video conference call, European Commission President, Charles Michel, said the commission would work toward a compromise with Hungary and Poland2, without elaborating on any specifics.
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.
In the UK, October’s consumer price index (CPI) reading6 surprised to the upside, coming in at +0.7% year-on-year, while core CPI – where energy and food readings are removed due to their volatility – also rose to +1.5%.
COVID-19 also managed to influence Brexit negotiations5, where the main development last week was the talks being put on hold after one of the negotiators in the EU team tested positive for the virus. There was some optimism, however, that a deal may be agreed early this week2, given time is moving on, although EU leaders expressed their desire to start contingency planning for a no-deal separation from the UK at their recent video conference. Furthermore, EU negotiators have also told representatives from the 27 member states that there are three main issues remaining unresolved in the talks versus the two (fishing rights and a level playing field) previously thought to be the sticking points.
Finally, the release of November’s flash/initial composite IHS Markit purchasing managers’ indexes show that the US has stayed in expansion territory (51.9), while both the Eurozone (45.1) and UK (45.8) moved back into contractions following the recently re-imposed lockdown restrictions.
World equities were up around +0.62% in US Dollar terms, but flat in Sterling terms (-0.07%), with the difference being the strength in the Pound, which has inched higher as Brexit negotiations appeared to progress.
Within equities, we noted earlier that growth stocks (-0.48%) underperformed value (+0.42%), with a strong rally in this year’s two most unloved sectors of energy (+4.00%) and financials (+1.57%). The bounce in energy stocks this month has been on the back of the positive vaccine news improving the outlook for economic activity, and since OPEC+ is also likely to extend its oil production cuts into the new year.
In terms of regional performance, Emerging Markets (+1.07%) and Europe (+0.73%) both outperformed the US (-1.01%), reflecting their higher exposure to the more cyclical sectors, and given the US is seeing sentiment affected by the growing number of virus cases.
Within bonds, there was a decline in government bond yields, but the rally in most equity markets led all bonds to generate a positive return. The best performing class during the week of 16 November was investment grade credit (+0.82%), helped by both lower government bond yields and tighter spreads.
Last week, the investment committee decided to increase the cyclicality of the portfolio. This is because we believe that the increasing number of viable vaccines being made available will improve the 2021 outlook for the global economy, and since the more cyclical parts of the market are also among the cheapest areas, which would be supportive of investors benefitting from the fundamentals and valuations.
Using the balanced portfolio, as an example of the changes, within equities we added +2% to our exposure to Dodge & Cox and reduced our exposure to both Fundsmith and Morgan Stanley by -1%.
In fixed income, we added +2% to each of our high yield bond managers (AXA and Muzinich), and reduced our exposure to US government bonds by -4%.
Investors will be keeping an eye out for any further vaccine developments, as well as news of their effectiveness, although the widespread rollout remains some time away. As such, in the meantime, the focus will remain on the rising case numbers in key global regions and whether further restrictions are imposed as a result.
In terms of economic data, it is a quiet week albeit for minutes of the last Fed monetary policy meeting on Wednesday 25, the usual jobless claims reading from the US on Thursday 26, as well as consumer confidence data from the EU on Friday 27 November.
Attention will remain fixated on Brexit with talks resuming via a virtual format as time really starts to run out. Any legal text will need to be translated into the EU’s various languages and ratified by the European Parliament before the end of the year for a deal to come into force.
Thursday 26 November is the Thanksgiving holiday in the United States.
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Sources: Nedbank Private Wealth and (1) John Hopkins University; (2) Reuters; (3) Deutsche Bank; (4) US Department of Labor; (5) Bloomberg; and (6) UK Office for National Statistics.
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