The week of 30 November saw markets remain in positive territory, albeit largely flat, in a week that saw positive news stories counterbalanced by the continuing impact of the pandemic on economies, ahead of the initial rollouts of vaccines.
The US, in particular, faces an onslaught from the virus after it reported its deadliest day of the pandemic, as record-keeping caught up from the Thanksgiving holiday weekend1. Meanwhile, the news flow continues to be positive on the vaccine front as the UK regulators approved the Pfizer/BioNTech vaccine on Wednesday 2 December, making the UK the first country to do so. With 800,000 doses arriving from Belgium, care home residents, frontline health and social care workers, as well as those with underlying health conditions, are being prioritised for the vaccinations, which started being administered on Tuesday 8 December2. It is expected that up to 4 million doses will have been delivered by the end of this month.
The difficulty the US is facing with regard to health systems is also having an impact on the economy. Although the US purchasing managers’ index (PMI) number3 stayed in expansion territory, the survey findings do not take into account the effect of the recent surge in US virus cases. Meanwhile, the latest jobs report saw payroll growth slow sharply in November to 245,000, bringing the unemployment rate marginally lower at 6.7% versus 6.9% in October4.
The bad economic numbers spurred on the House Speaker, Nancy Pelosi, and Senate Minority Leader, Chuck Schumer, to indicate support for a US$908 billion stimulus proposal2, which has set off a fresh round of negotiations with the White House.
And while the Federal Reserve (Fed) chair5, Jerome Powell, noted that the “recent news on the vaccine front is very positive for the medium term”, he stressed that more fiscal stimulus may be needed. He also indicated that the Fed was not rushing to taper its sizeable bond buying programme.
In Europe, the main data releases last week were the composite PMIs6. In the Eurozone, the numbers were revised up from the flash reading to 45.3, while the UK also saw a decent upward revision to 49.5, just marginally in contraction territory.
In the UK, reports over the weekend suggested a deal between the UK and EU was in the balance, although the two sides still seem far apart on the key issues, with the level playing field remaining the main sticking point2. Wednesday 9 December is now seen as the last point a deal can be agreed, with Boris Johnson due to fly to Brussels on Tuesday 8 December in an attempt to break the deadlock after an unsuccessful phone call with the European Commission President, Ursula von der Leyen.
Meanwhile, the UK government’s controversial Internal Market Bill5 made its way back into the Commons, after the House of Lords amended the bill, with the Commons then voting to reinstate the contentious clauses. However, the government has said these would be removed if the UK agrees a Brexit deal with the EU.
Finally, Brent Crude and West Texas Intermediate oil prices reached their highest levels since the pandemic began, after the OPEC+ group reached an agreement to roll back production cuts in 2021 more gradually than before.
The news left the MSCI All Country World Index up +0.4% in Sterling terms, and +1.5% in US Dollar terms. Optimistic noises that the UK and EU were inching towards a Brexit deal saw Sterling and UK equities (+2.74%) outperforming, only for that progress to be brought into question again over the weekend.
Focusing on equities, the rotation we have seen through recent weeks was still apparent, but much more muted, and sector returns were more mixed. So information technology (+1.53%) got some wind back in its sails, with energy (+1.94%) continuing to recover. Utilities (-2.55%) and consumer discretionary (-1.29%) lagged. Style-wise, value (+0.46%) marginally beat growth (+0.20%), while the more cyclical small capitalisation stocks (+0.90%) beat their large capitalisation peers (+0.31%).
In line with markets, Dodge and Cox (which we recently added to) turned in a couple of percent of outperformance, with Nedgroup Equity and TT Emerging Market also outpacing their benchmarks.
As for fixed income, we saw a continuation of recent trends with riskier corporate bonds
(-0.19%) outperforming sovereign bonds (-0.48%), although both generally fell in value. This supported our short duration/long credit strategy, with AXA, Muzinich and PIMCO all adding value.
Property fund performance was also solid, with BMO Commercial Property Trust standing out in a big way as it rose 20%. This bounce reflected the announcement to up the dividend by another 40%. This followed its previous announcement that it was restoring the dividend to 50% of the previous dividend. The board also announced good rental collection, with 86% of due rent collected for Q3 and 84% for Q4 so far.
We also received the formal confirmation that both classes of the KKV Secured Loan Fund have now been put into an orderly wind-up process and that shareholders also approved the increased powers the board asked for to expedite matters. While it will take time to find the best and cleanest solution for shareholders, the board’s approach is in the interest of shareholders, and we see upside from here.
Finally, Hipgnosis announced its interim results to 30 September, which saw the NAV increase over 7.5% to 125.4p per share on the Ordinaries and 112.39p on the C Class. The main driver for this bump was a 0.5% reduction in the discount rate used by the independent valuer, Massarsky, from 9% to 8.5%. And we expect further moves on this in the future as streaming allows the music royalty cashflows to be much more predictable and, therefore, worthy of a lower discount rate. We also expect a lot of growth in revenues from streaming. When Hipgnosis first came to market in early 2018, there were 40 million paid subscribers using music streaming services. Today there are 400 million.
Data highlights for the week include the US consumer price index reading for November on Thursday 10 December, and the US consumer sentiment index flash reading for December on Friday 11 December.
We’ll also get the UK’s gross domestic product number for October, while China will be releasing data on its November trade balance.
All eyes remain on Europe this week, given Brexit talks are still ongoing, despite the disputes over the EU’s long-term budget and recovery fund continuing, ahead of a scheduled summit of EU leaders. On top of this, we also have the final European Central Bank meeting of the year on Thursday 10 December, which is expected to see the central bank recalibrate its policy stance.
In the US, the focus remains on the stimulus talks, as well as the Food and Drug Administration meeting on Thursday 10 December, when the authorisation for the emergency use of the Pfizer/BioNTech vaccine will be decided. If the go-ahead is given, the vaccine could be distributed as soon as Friday 11 December.
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Sources: Nedbank Private Wealth and (1) John Hopkins University; (2) Bloomberg; (3) Institute for Supply Management; (4) US Department of Labor; (5) Reuters; and (6) IHS Markit Research.
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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