November 2020 - Caution is now the name of the game
November was an eventful month and a historic month for most of the indices: US Markets saw their best month since 1987, with the Dow Jones passing the 30,000 level for the first time. The Eurostoxx 50 also had its best month ever.
The month began with the US Elections and despite the uncertainty around the outcome of the election during the first few days, markets reacted positively to the fact that a Blue Wave was off the table (we’ll have to wait until January 5th for Senate final results though). Indeed, a divided Congress would mean an increase of corporate taxes, as proposed by Biden, will not be immediate. Also, historically, a Democrat president alongside a divided Congress is the best scenario for markets, which rise, on average, by 14.8% per year.
On the COVID side, the race to a vaccine came to an end with three major announcements: Pfizer was the first one to announce with 90% effectiveness of its vaccine; a week later, Moderna announced a 94.5% effectiveness rate and finally, Astra Zeneca announced a 70% success rate of its own trials. As of today, Pfizer vaccine was approved in UK and by FDA as well, while Moderna is waiting for FDA approval. In parallel, Regeneron received FDA approval for the emergency use of its treatment.
Overall, these news around the vaccine brought optimism to the markets as the chance of a recovery in 2021 is now bigger than ever. As a result, a rotation has begun, out of growth companies (mainly tech) that have supported the markets and the economy since March and into the cyclicals and other value stocks that lagged this year. Therefore, the tech sector became a defensive play, as it could jump in the case of bad news.
Given this environment of less uncertainties, the VIX price was also down from 38 to 20 during the month. In addition, an eventual economic recovery pushed investors back to a risk-on attitude, and Oil and Gold evolved in two opposite directions as expected: Oil gained more than 25% MTD while Gold lost more than 6%.
November also marked the closing of the Q3 earnings season: overall, companies reported a better than expected Q3, but failed to deliver good future guidance as most of their activity will depend on Corona developments.
In the US, no stimulus plan has yet been reached and the clock is ticking: if no bill is signed by December 18th, the government will face a shutdown. The Democrats wanted a plan of $2.2 Trillion, as in the first CARE act, while Republicans proposed $500 Billion only. However, talks are now around a Stimulus Bill of $908 Billion. In parallel, Mnuchin asked the Fed to end the Purchase Program by year end and to transfer back to the Congress the unused capital. A few days later, Janet Yellen was appointed to be the next (and first woman) Treasury Secretary. This news also helped to support the markets, as Yellen is known to adopt dovish policies and as she is a former chair of the FED, the cooperation with Powell should be smooth and may lead to a stimulus deal larger than the one that could have been reached under the previous administration.
The economic data coming from the US continues to be encouraging: Durable Goods orders stayed above consensus, personal consumption increased (though personal income was down), inflation is back to 1.2% and the unemployment rate is now down to 6.7%. The Fed left rates unchanged as expected.
In Europe, lockdowns were put in place in major cities, putting more pressure on consumption. The ECB left rates unchanged as expected and added further stimulus during the last meeting in December: they increased the Purchase Program by 500 Billion Euro and extended it for 9 additional months.
The Brexit negotiations went on for another month, and the only clue we get that we may be close to a deal is the resignation of Boris Johnson’ two major advisors that are known for being anti deal.
In China, numbers continue to show a recovery and it proves that China can rely on its local consumption and does not depend on exports to support the economy. In addition, China and 14 Asia Pacific countries signed during the month, what became the largest trade agreement ever signed, covering some 2.2 Billion people. The Chinese Government continues to put pressure on big companies, in terms of regulations, pushing Alibaba stock more than 13% lower and ordering ANT Group to delay what should have been the biggest IPO ever.
Regarding the US China trade war, Biden could have a more ‘peaceful’ and diplomatic approach than Trump and so we may see the cold war between US and China begins to warm up a bit.
Trump on his side, is taking advantage of his last days as president to pass executive orders against China: from January, US investors will not be able to invest in some Chinese companies with any link to the Chinese military. Note that most of these companies are not public yet.
On M&A activity: AMD bought Xilinx for $35 Billion, LVMH bought Tiffany, BBVA sold to PNC (US holding) its US business and Salesforce announced the acquisition of Slack for $27.7 Billion, making it the largest deal ever made in the cloud sector.
Tesla will be joining S&P 500 on December 21st.
On the credit side, spreads tightened for both investment grades and high yields. Municipal bonds had a good month, and net inflows were seen. The 10-year Treasury yield closed the month slightly down (from 0.87% to 0.84%).
We see the appetite for riskier assets coming back and high yields have attracted many investors lately. We prefer, for now, staying on the safe side and to invest in Fallen Angels, where we see some opportunities as the credit risk is reduced and the companies have built some solid cash reserves during the pandemic.
From our side, risk management is more important than ever, as despite the good news of last month, the situation remains very fragile with COVID-19 still around and markets remain extremely nervous. Therefore, we recommend staying balanced between fixed income and equities, at least during H1. We could see some profit taking after the last month’s performance and if this is the case, we will take advantage of it to increase further the tech sector, as a defensive play, while we increase in parallel value companies and cyclicals to play the recovery.
As always, risk-management combined with rigorous sector and geographical diversification will remain key factors for investment performance. You are more than welcomed to contact us to discuss our investment views or financial markets more generally.