Market Commentary Update - December 2020

Here is a summary of investment markets for the month of December 2020

Global share markets higher

Global share markets were higher in the December quarter, driven largely by encouraging developments on the COVID-19 vaccine front after the likes of Pfizer and German partner BioNTech, Moderna and the UK’s AstraZeneca (together with the University of Oxford) all announced vaccines that proved to be more than 90% effective in combatting the virus. This saw investors pile into stocks on hopes that those countries hit hardest by the pandemic will soon be able to begin the process of (fully) reopening their economies. The UK and the US were amongst the first to roll out the vaccines in early December, while European governments launched a co-ordinated, cross-border vaccination program toward the end of the period. In saying that, hopes of a return to normal any time soon were tempered somewhat by a late surge in new virus infections globally that forced officials in many countries to reintroduce various restrictions to help contain its spread. Perhaps more concerning, though, was the emergence of a new strain of the virus in the UK, which scientists warned spreads more quickly than others. Stocks also benefited from easing US political uncertainty after members of the Electoral College officially confirmed Joe Biden as the country’s next president and congressional leaders finally agreed a USD900 billion stimulus package that will see most Americans receive USD600 stimulus cheques. Both President Donald Trump and Democrats had pushed for USD2,000 stimulus cheques but this was rejected by (Republican) Senate Majority Leader, Mitch McConnell. Sentiment was further buoyed by strong rebounds in growth in the US, China and the euro-zone, the European Central Bank’s decision to increase the size of its Pandemic Emergency Purchase Program by EUR500 billion (to EUR1.85 trillion) – though investors had hoped for more – and news that Britain and the European Union had finally reached a post-Brexit trade deal. The deal, which came just days before the deadline for negotiations lapsed, is expected to limit any potential disruption stemming from the divorce. More broadly, stocks benefited from a series of better-than-expected US and European earnings results, an uptick in US corporate activity, including Advanced Micro Devices’ USD35 billion bid for Xilinx, and the signing of the Regional Comprehensive Economic Partnership; a free trade agreement between 15 Asia Pacific nations, including Japan, Australia and China.

Limiting the advance were some sobering comments from US Federal Reserve chairman, Jerome Powell, who said US economic activity remains “well below” pre-pandemic levels. Stocks were also impacted by rising tensions between the US and China and some disappointing US jobs and consumer confidence data. Tensions between Washington and Beijing escalated after the Trump Administration blocked Chinese cotton imports and widened an executive order preventing US companies from investing in Chinese firms suspected of having military involvement. Meanwhile, the latest US jobs and consumer confidence figures fell short of expectations. The latter, which declined for a second consecutive month in December, was especially disappointing given the consumer accounts for around 70% of all US economic activity.

At the country level, the three major US indices – the S&P 500 Index, the Dow Jones Industrial Average and the tech-heavy NASDAQ Composite Index – all hit record highs during the quarter. In fact, the Dow Jones Industrial Average, which comprises the country’s 30 biggest stocks, hit the 30,000-point mark for the first time in its 125-year history in November. Share markets were also higher in Japan, China, the UK and Europe; including Germany, where stocks hit fresh highs despite rising coronavirus cases.

Looking ahead

Vaccine prospects are likely to make 2021 a year of global economic recovery. While markets have priced in a fair amount of the good news, more gains seem possible as corporate profits rebound and central banks maintain accommodative monetary policies. With the world in the early post-recession recovery phase of the business cycle, our medium-term outlook for economies and corporate earnings is positive. We believe 2021 will feature an extended period of low-inflation, low-interest-rate growth that favours equities over bonds.

We maintain our preference for non-US stocks over US stocks. The post-vaccine economic recovery should favour undervalued cyclical value names over expensive technology and growth stocks. Additionally, we believe emerging markets should benefit from China’s early exit from lockdown and further stimulus measures.

For fixed income assets, we continue to see government bonds as universally expensive. Low inflation and dovish central banks should limit rises in bond yields during the recovery phase. In terms of credit, we view both high-yield and investment-grade debt as slightly expensive; though they are attractive given the post-vaccine cycle outlook.

In the currency space, we expect the US dollar to weaken amid the global economic recovery due to its counter-cyclical behaviour, which has historically seen it decline in the recovery phase. Economically sensitive ‘commodity currencies’ like the Australian, New Zealand and Canadian dollars should continue to strengthen.

Moving forward, we do see some near-term risks, including investor sentiment, which has become overly optimistic following recent vaccine announcements. This makes markets more vulnerable to negative news, which could include further lockdowns in Europe and North America as virus cases there escalate, logistical difficulties in distributing the vaccine and negative economic growth in early 2021 (should government support measures be unwound too quickly). Regarding US policy agenda, Democrats seized a Senate majority following the recent runoff election in the state of Georgia, which will make it easier for Biden to push through his policy agenda, including tax reform, healthcare changes and energy investment. Outside of the US, geopolitics could also deliver negative surprises from China, Iran or Russia as the new administration of US President-elect Joe Biden takes power.