January 2021 - A “Very Happy” start of the year
If the financial markets’ resilience surprised us in 2020, we managed somehow to find some rationality by explaining it with the tech sector’s impressive performance that supported most of the markets. However, the first week of 2021 seems to defy logic and common sense.
Indeed, it was a remarkable ‘business as usual’ atmosphere that prevailed during the first week in capital markets, although Georgia made possible the unexpected and unpriced Blue Wave and Washington faced a turmoil during Biden’ confirmation that resulted in the death of five people and the resignation of no less than 16 Trump administration officials. Moreover, data showed decreasing non-farm payrolls instead of jobs creation and on top of that, new COVID-19’ variants that are spreading fast caused many countries to impose new restrictions and lockdowns.
Nevertheless, during the first week of the year, US markets reached new record highs and the markets in Europe had their best week in two months.
We certainly enter 2021 with much less uncertainties. After a historic and eventful November, December, which was a bit calmer due to the holiday season, delivered some big news as well: a Brexit deal was reached, additional stimulus packages were announced, US Banks successfully passed the stress tests and COVID-19 vaccines are starting to be distributed.
So, it seems markets are more focused on the good news than on the brutal handover between Trump and Biden or the Corona surge in daily cases and deaths since the start of the year.
Concerning the Blue Wave, while markets priced a divided Congress in November, the elections in Georgia gave Democrats control of the Senate and so, of both Houses of Congress. A Democrat president alongside a Democrat Congress is normally not the best scenario for capital markets, yet the latter welcomed the news and the rally continued, even for the tech stocks, despite some of the pessimistic forecasts. One of the reasons is that given the fact that the pandemic is obviously not over, a fully Democrat majority could mean more stimulus and faster; therefore, small businesses may benefit from further aid (small caps +5.9% YTD) and Americans can look forward to receiving a bigger check, increased from $600 to $2,000, a proposition that was strongly supported by Trump by the way. Also, this Blue Wave allowed some sectors to outperform and one of the best performing sectors after the Georgia results was Clean Energy, as Biden’s priority after managing the Coronavirus is climate change. Finally, even if the Democrats control the Senate, it is not by much; there are 50 Democrat senators (+ Kamala Harris) and 50 Republican senators, meaning that any reform, such as a corporate tax hike, will not be easy to pass. All those factors could explain the rally of these last few days, despite the political events and an ongoing pandemic.
Moreover, Central Banks keep supporting the markets: the FED announced in December the extension of the Purchase Program (despite Mnuchin’s opposition), into 2021. It will purchase $120 Billion of bonds and MBS’s every month. In Europe as well, the ECB announcement for of a further stimulus (€500 Billion to be deployed within 9 months) together with TLTRO’s (financing system provider for credit institutions) loosening conditions are sustaining the economy and so, the markets.
In China, the Government continues to weigh on its giant techs. Alibaba was lately in Chinese regulators’ focus and Jack Ma’s disappearance for a couple of months has contributed to feed some speculation about China’s nontraditional and extreme measures against its critics. Regarding the US-China trade war, after a flip-flop of the NYSE, three big Chinese Telecom companies and four other Chinese ADR’s have finally been delisted from the US markets, as ordered by Trump in late November. Biden’s team did not comment on this, so that a revocation is still possible, although unlikely.
On the credit side, spreads tightened for both Investment Grade and High Yield bonds. The US 10y Treasury now yields above 1.11%.
Muni Bonds attracted many investors during 2020 and were among the best performers with a return of more than 10%. Despite a tough start to the year (-0.7%), we continue to favor this asset type as our safe investment, as it should be sustained by further aid being sent to States and localities.
For the rest, the search for yield should continue into 2021. Within the USD Investment Grade bonds, we prefer the BBB Universe, since the higher rating offers no incentive to be exposed to the credit risk: there is no added return above the CPI rate, only added risk. Also, with a weak USD, we overweight the Asia sovereign debt in local currency.
On the High Yield side, a global recovery makes them look appealing again. From our side, we overweight the Fallen Angels, where we see interesting returns and lowered risk.
Regarding our positioning in Equities, we continue to deploy available cash, whenever we see some weakness in our strong convictions: selected tech sectors, the Green Industry, cyclicals and healthcare (biotech and devices).
In terms of geographic allocation, since Europe lagged behind the other developed markets in 2020, a global recovery in 2021 could allow it to make up for its loss. We favor Germany, which is more reliant on exports. We also like Japan, which was initially less impacted by the pandemic and therefore enters 2021 with a relatively resilient economy. Japan could benefit from a global recovery as well, in that Japanese trading stocks are in large part in the discretionary sector and/or of exporter companies (auto sector, electronics).
The risk-on attitude back to the markets should also benefit the emerging markets. We continue to favor China; however, we stay aware of the danger the Communist Regime could present for financial markets, when it decides (wrongly) to intervene into the companies’ way of doing business.
Finally, we remain cautious for H1, because we identify some risks in the real economy that can be reflected at some point into financial markets. Indeed, social tensions accompanied us into 2021 and although financial markets do not seem to care for now, we stay aware that the growing inequality and the social unrest caused by the pandemic can weigh, sooner or later, on the growth of some countries and so eventually on financial markets as well.
As always, risk-management combined with rigorous sector and geographical diversification will remain key factors for investment performance.
You are more than welcome to contact us to discuss our investment views or financial markets more generally.
We wish you a Happy and above all a Healthy New Year!