World Market Review November 2020

November’s vaccine announcement was a pivotal moment for markets. Before the announcement, stocks were stuck in two-speed mode; resilient growth companies were at all-time highs, while more cyclical sectors had been pummelled. The vaccine has flipped sentiment on its head, as investors poured back into cyclical stocks, anticipating an end to pandemic lockdowns. However, we think significant questions remain. How long until the vaccine can fully reopen the economy? Have changes to consumer behaviour been permanent? Will interest rates stay low?

The UK’s second lockdown had a muted effect on markets. Many businesses were better prepared than in the spring, and much of the UK stock market derives revenue from overseas. In fact, the pound strengthened over the month, as rumours spread that a Brexit deal was getting closer.

The UK stock market has lots of cyclical companies, which means it is more tethered to the ebbs and flows of the economy. The vaccine was therefore great news for the FTSE, which is why we added to our UK index funds early in the month. Some of the largest index holdings, like banking giant HSBC, rose almost 20%, while oil majors Royal Dutch Shell and BP jumped 33% and 25% respectively.

Joe Biden has been assembling his economic team in preparation for taking office in January. Janet Yellen, who headed the Federal Reserve under Barack Obama, is tipped for the key role of Treasury Secretary. She is a well-known quantity, and as a long-term “dove” (supportive of economic stimulus) will go down well with Wall Street. For his budget director, Biden took a less establishment route and chose Neera Tanden, an outspoken progressive popular with Democratic activists, though she may struggle to get confirmed by the Republican-led senate.

Like the rest of the world, US markets rose on the vaccine announcement, but the bounce was smaller because the US market is heavily weighted towards the tech giants, which had already boomed during the pandemic. Because the vaccine will help economies re-open, sentiment has turned bearish for the “safe haven” US dollar. To neutralise the risk of a falling dollar, we added a currency hedge on the US index in our tactical portfolios.

President Xi launched a new target to double the size of China’s economy by 2035. That sounds rapid by Western standards but is below what China has achieved in recent decades. However, China now faces several new headwinds; rising debt, weak Western demand, and a working-age population that has started to shrink, and will continue to shrink for the rest of the century. However, this need not be negative for investors. As countries mature, a new middle class emerges which is happy to increase spending on consumer products. This provides a rich opportunity to tap into growing brands and networks, which is where our Chinese funds focus on.

European economies were clobbered by the restrictions around the second wave, but these are now being eased. The vaccines and Biden’s election are both especially bullish for Europe; the vaccine will allow Europe’s tourism-heavy economy to reopen, and Biden will be more pro-EU than his predecessor. The incoming president is unlikely to continue Trump’s trade wars, which should benefit Europe’s strong exporting sectors, particularly in cars and luxury goods. For this reason, we added a new European value fund, which provides exposure to large manufacturers like BMW.

Japan’s export-orientated economy was hit indirectly by fresh lockdowns in the West, but the country can look forward to renewed overseas demand in 2021, coupled with a boost from the postponed Tokyo Olympics.

The vaccine is fantastic news, but here at CPN, it is our job to question the assumptions of the market. We are keen to deploy cash into areas that offer the best value but mindful to avoid “value traps”; businesses that look cheap, but which have been structurally damaged by events this year. We, therefore, take a two-pronged approach, continuing to invest in high-quality areas like technology, where we see the best long-term growth while taking a more tailored and active approach to ensure we invest in areas with the greatest value.