By Jan Faure
Markets surge on vaccine progress and optimism on Biden presidency.
November saw a strong surge in risk assets including global equities, oil, industrial commodities and emerging-market currencies, while safe-havens such as the US dollar and gold slipped. The two primary drivers behind the rally were positive vaccine news and a trade-friendly US election result. Many European markets recorded their best month ever, helping claw back year-to-date losses. It was a significant turning point for investors and shifted sentiment from “Can the market hang on?” to “What can possibly go wrong?”.
The rally started after Democrat Joe Biden's US election victory in early November raised hopes for more government stimulus in support of the pandemic-hit US economy and for more policy predictability. Compared to Donald Trump, Joe Biden is seen as market-friendly from the perspective of reduced policy uncertainty and improved global trade relations. As it stands, it looks like the Democrats will continue to control the House while Republicans will control the Senate (control over the Senate will only be known early-January following two runoff elections in the state of Georgia). For many investors, this combination is seen as ideal: a president who is less combative on the global stage, but who’s party will have difficulty raising corporate taxes (and other major policy changes) due to Republican control of the Senate.
Positive developments on Covid vaccines and the speed with which they are likely to be rolled out have also boosted markets. In a matter of weeks, pharma companies Pfizer, AstraZeneca and Moderna announced positive results from phase three trials. It is now expected that a large proportion of the public across major developed countries will receive a vaccine by the middle of 2021, driving a rapid recovery in global activity and growth.
With the end in sight to a tumultuous year, investors are quickly turning their attention to the major themes and market drivers for 2021. For equity investors, depressed cyclical and value stocks are set to be the beneficiaries of a post vaccine environment. There is already renewed interest in developing market equities and bonds, underperforming Eurozone equities and a strategic shift from growth to value. Growth stocks, mostly comprising companies aligned to secular trends in technology, have significantly outperformed value stocks over the last decade. It is highly unlikely though that growth stocks will fall out of favour with investors due to their deeply entrenched secular nature.
The key macro drivers for 2021, all supportive of equity markets, include continued accommodative monetary policy, an improvement in global trade (due to friendlier trade relations) and additional fiscal stimulus from developed market economies. When combining this with an anticipated vaccine roll-out, it sets the scene for a strong recovery in economic growth and company profits.
GLOBAL INDICATORS: Local reporting currencies