Friday, 4th of December 2020
“Life cannot subsist in society but by reciprocal concessions.”
– Samuel Johnson
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The extraordinary global equity rally that began in early November showed few signs of breaking down this week, with US indices hitting fresh highs on an almost daily basis. The S&P 500 Index is up +0.7% for the week ahead of the Friday morning open, while the NASDAQ is up +1.4% and the DJIA Index continues to hover around the record 30,000 mark. Elsewhere, the MSCI Emerging Market Index is up +0.7% (in USD), while the pan-European STOXX 600 Index is flat. Robust Manufacturing PMIs certainly played their part in supporting risk appetite. The final November readings for the Euro Area (53.8), the UK (55.6), the US (56.7), and China (54.9) were all in positive growth territory (i.e., >50) and many beat fairly buoyant expectations to boot. This shows that despite coronavirus-related restrictions returning in many places, manufacturing industries in all the major regions of the world have continued to recover.
However, to be clear, a handful of positive economic data is not driving the current equity rally. Shortly before the US Presidential Election on 3rd November, global equities inflected upwards; and since then there has been no stopping them. For sure, Biden’s resounding election victory (and the failure of the Trump campaign’s legal effort to overturn the result soon after) dispelled some of the uncertainty that had hung over markets in October and helped to shift sentiment in a more positive direction. But by far the most important contributor to the equity market momentum was the barrage of encouraging vaccine news. At the start of November, it was not clear that mankind would ever have even a moderately effective vaccine to combat covid-19. However, by month-end, we had three vaccines – each more than 90% effective against the disease. It is no wonder, therefore, that many equity markets recorded their best month ever in November. This was particularly true of European markets. Across the continent, harsh lockdowns imposed in the spring have eviscerated local economies, and the draconian response to a new winter wave of the coronavirus threatens to do more damage still. Perhaps in no other region does the availability of a vaccine change the outlook so much. And this explains why the STOXX 600 Index was up +13.7% in November, with the worst covid-19-affected European countries leading the pack: France’s CAC 40 was up +20.1%, Italy’s FTSE MIB was up +23.0%, and Spain’s IBEX 35 was up a whopping +25.2%! (The UK’s FTSE 100 was also up +12.4% in its second-best month on record, but it lagged the other virus epicentres given ongoing Brexit uncertainty.) We believe that further gains are likely for equity markets going forward. Long-term and institutional investors take time to change their positioning in response to events – and this means that prices tend to move in trends. There is no reason to expect that now will be different, and therefore we do not believe that it is too late to participate in the rally (despite its progress to date). It is also clear that, from early next year, the Biden Presidency will be pushing for significant monetary and fiscal stimulus. Cue another leg to the rally! That said, there are no straight lines in finance. Volatility, particularly when a global recession is underway, is inevitable. We recommend you keep invested – but proceed with caution.
Brexit is once again in the spotlight this week. Indeed, this round of negotiations is likely to be the most important yet if the two sides still hope to strike an agreement before the transition period ends on 31st December. EU officials are currently in London, where they are locked in intensive talks with their British counterparts. Multiple sources suggest that a deal is imminent – and may be done this weekend. The Irish government in particular has been making a lot of positive noises that reinforce this perception. Of course, other sources suggest that the two sides remain far apart on the three big issues (i.e., fisheries access, state aid rules, and enforcement of the deal terms), and it is impossible to know how things look to negotiators at the coalface. Nevertheless, with so much at stake we think that a deal will indeed now be done. Naturally, there is a lot of huffing and puffing from both the UK and EU about the other side. But this appears to be brinksmanship aimed at securing last minute concessions, and not to be an existential threat to the Brexit deal itself. Moreover, it should be remembered that the optics of any Brexit agreement will be important for both the UK and the EU. They will each want to convince their domestic audiences that they were able to get the best deal possible after such a long and tortuous process. We spoke last week about the case for UK equities, which are trading at a substantial Brexit-related discount to their European peers. The event-driven part of that thesis may be about to crystallise. We will find out soon enough.
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