Financial markets rose again during the week of 23 November, meaning the month-to-date equity returns are up an astonishing +10.13%, in Sterling terms, a result no one would have predicted at the start of the month.
The virus and vaccines continue to dominate the news, with the number of new cases coming in lower in most of Europe, on the back of the restrictions put in place, but remaining high in the US1. Meanwhile, there were also concerns raised following the publication of the AstraZeneca/Oxford University results given the 90% efficacy level was produced in a trial that made mistakes. This could potentially delay its rollout although AstraZeneca’s CEO has stated that the company will want to test the increased effectiveness in an additional global trial, rather than add an ‘arm’ to the current trials2.
The results also prompted continued rhetoric from President Trump that the vaccine announcements were delayed to harm his re-election chances, and he remains adamant that the US election results have been compromised. While the transition process has now started, and Trump has stated that he will relinquish power if the Electoral College affirms Joe Biden’s win on 14 December, he added that he may never formally concede or attend Joe Biden’s inauguration.
Meanwhile, President-elect Biden has said that he is planning to nominate the former Federal Reserve (Fed) Chair, Janet Yellen, to serve as his Treasury Secretary. Yellen is seen as a market-friendly option and will likely seek to align fiscal and monetary policy, which could mean quickly reversing the decision of the current Treasury Secretary, Steven Mnuchin, to stop the Fed’s emergency lending facilities, as we highlighted before.
The challenges to the Fed’s role came as November’s monetary committee meeting minutes were released3, which noted that “immediate adjustments to the pace and composition of asset purchases were not necessary”, but “they recognized that circumstances could shift to warrant such adjustments.” There was also a discussion of updating forward guidance on its bond-buying strategy “fairly soon”, ensuring that quantitative easing would end well before the Fed raised interest rates, although more action might be needed by the central bank if Congress fails to agree a stimulus bill.
This much-vaunted bill remains mired in the diverging views of the Republican-controlled Senate and the Democrat-controlled House, despite the US weekly initial jobless claims rising by more than expected for a second week running4 and as US consumer confidence was also down2.
In Europe, the issues surrounding its next stimulus package and the EU budget are also yet to be resolved. The Hungarian and Polish prime ministers are still refusing to back down on the dispute over the rule of law, which is a problem since the long-term budget and recovery fund need unanimous support from all 27 EU member states1 to be approved. As such, a compromise will need to be forged for this to go through, given the economic picture in the EU is not improving as much as is hoped, for example, Germany’s latest ifo (Information und Forschung/Research) Business Climate Indicator fell sharply in November in both the retail and service sectors2.
As the negotiations continue, the minutes from the European Central Bank’s (ECB) 28-29 October meeting5 seem to set the stage for some form of additional monetary easing at its next meeting on the 10 December.
Compromise is also needed in the Brexit negotiations given the key issues, regarding fisheries; EU rules on workers’ rights, environmental regulations and state aid; and the level playing field for businesses, are still unresolved2.
Markets advanced again last week, with the MSCI All Country World Index up +2.06% in Sterling terms and +2.36% in US Dollar terms.
Focusing in on equities, the rotation we have seen throughout much of November continued, with energy (+7.17%) and financials (+3.18%) again leading the way, while more defensive sectors generally underperformed. Market-wise, Japan (+3.17%) was the star as the UK trended flat (+0.41%). Style-wise, value (+2.49%) still had the jump on growth (+1.68%), although it’s still worth bearing in mind that even with the recent gains, value (-2.72%) remains 30% behind growth (+27.39%) year-to-date.
The market performance flowed through to the underlying funds in client portfolios as Dodge and & Cox (which we recently added to) benefited, while Morgan Stanley Global Brands and Fundsmith (which we recently reduced) underperformed as their styles were overshadowed in the rotation. The TT Emerging Market strategy also had a solid week.
Fixed income was also a solid area for us, with credit up and government bonds generally losing a touch, at least in the US, and at the global level, while our corporate bonds added value.
Property was a mixed bag last week, the month-to-date performance of the sector has made up significant ground, although we continue to believe that BMO Commercial Property Trust remains very cheap due to its excessively large discount given the ongoing headwinds facing the commercial property sector.
Lastly, among the other alternatives, the renewable energy holdings saw performance held back as both Greencoat Renewables and The Renewables Infrastructure Group (TRIG) launched discounted public offerings, which saw the share prices driven lower. Although, TRIG’s offer has closed, Greencoat Renewables capital raise is ongoing and, as such, is likely to continue to affect portfolio values.
November’s numbers for purchasing managers’ indexes will be keenly watched across the manufacturing, services and (combined) composite readings for a number of countries, as to whether these forward-looking surveys see optimism in the relevant industries and project growth through a reading over 50. Meanwhile, the Eurozone will also release its flash consumer price index estimate for November, and the latest US jobs numbers are out.
Brexit remains in the spotlight this week, with only a month separating now and the end of the transition period on 31 December 2020. Meanwhile, in the Houses of Parliament, while the Lords look likely to remove the controversial clauses from the Internal Market Bill, these are likely to be re-added when the bill returns to the Commons. As both houses need to agree on the bill if it were to be passed into UK law, there’s still some way to go.
Finally, we are due to hear from both the Fed and the ECB heads, while the Fed will also be releasing its Beige Book on Wednesday 2 December, which provides its summary on the current US economic conditions.
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Sources: Nedbank Private Wealth and (1) Reuters; (2) Bloomberg; (3) Federal Reserve; (4) US Department of Labor; and (5) European Central Bank.
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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