December was another strong month for investors as riskier assets continued their rise. This was driven by the encouraging start of COVID-19 vaccinations in the UK, US, EU and other parts of the world, as well as the passing of the second virus-linked stimulus package in the US and extraordinarily supportive central bank policies. Meanwhile, the eleventh hour Brexit agreement, reached by the UK and EU, allowed both sides to avoid a destructive no-deal, hard scenario.
Despite the recent resurgence of COVID-19 infections in many parts of the world, markets seem to be willing to look through the short-term disruption it has caused and, instead, focus more on the path back to normality. However, as more lockdowns are imposed, partly due to the new and more virulent strains of the virus discovered in the UK and South Africa, economic data in Europe and the US has continued to come through weaker than expected, forcing central banks to maintain support for the foreseeable future.
Brexit was never far from the headlines as negotiations continued frantically throughout December. With time quickly running out, tensions between the UK and EU rose further as leaders in Europe ordered a complete blockade of UK goods and services, for several days, in an effort to stop the new UK strain reaching mainland Europe. The ensuing disruption, caused by the miles of lorries queueing around the ports of Dover, seemed to focus minds and, with little time to spare, a deal was agreed. While it allows for the tariff-free trade in goods to continue between the UK and the EU, there are still many issues yet to be negotiated, among which are arrangements for the financial services sector.
Equity markets rose +2.4% as measured by the MSCI All Country World Index in Sterling. Regions with a better control of the pandemic outperformed those where infections continued their upward trajectory, with Emerging Markets advancing the most (+5.0%), followed by Asia ex Japan (+4.5%). Europe ex-UK (+2.2%) was behind the leaders, with the US (+1.8%) and Japan (+1.9%) lagging the most. The UK was somewhere in the middle, as the Brexit breakthrough became a tailwind for UK equities (+3.2%).
The strongest sectors were cyclicals, helped by a style rotation towards materials (+4.7%) and financial services (+3.0%), and ‘stay at home’ type businesses in IT (+4.6%), which have performed well throughout the pandemic. The weakest sectors have been those most impacted by the pandemic, with real estate (-0.3%) being the worst performing area. Utilities (+0.2%), industrials (+0.5%) and consumer staples (+1.1%) were also behind the pace.
In terms of style, growth (+2.8%) outperformed value (+1.9%), while smaller companies (+5.1%) outperformed larger companies (+2.2%).
Within fixed income, investors’ appetite for risk helped higher yielding corporate bonds, as measured by the ICE Merrill Lynch Global High Yield Index (+1.8%), outperform investment grade credit and safe haven government bonds, with the Merrill Lynch Global Corporate Investment Grade Index up +0.4% and the JP Morgan Global Bond Index up +0.1% (all hedged to GBP).
The ‘risk-on’ tone also boosted commodities, with the Bloomberg Commodities Index up +2.7%. Agriculture (+8.0%), crude oil (+4.2%) and gold (+4.1%) were the strongest sectors, with falling real yields pushing the opportunity cost of investing in precious metals to all-time lows. Industrial metals (-1.9%) lagged.
The Pound was stronger against most major currencies on the back of the Brexit deal with the EU. It was up against the US Dollar by +2.6%, by +1.6% relative to the Japanese Yen and by +0.1% versus the Euro. The South African Rand was an exception to this trend, with Sterling weakening against it by -2.5%.
(Notes: All monthly data is quoted in Sterling terms unless otherwise stated).
|INDEX||END NOVEMBER VALUE||END DECEMBER VALUE|
|DJ Ind. Average||29638.64||30606.48|
|£ Base Rate||0.10||0.10|
This month’s values quoted as at 31/12/2020. The above values are sourced from Bloomberg and are quoted in the relevant currency.
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