In the December issue we discuss how the COVID-19 vaccine announcement is a booster for equities over bonds.
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Equities were boosted in early November by vaccine announcements from Pfizer-BioNtech and Moderna. Given that test results show these vaccines prevent 90-95% of infections, it could potentially be a game changer to break down transmission chains and allow herd immunity to be achieved. However, there are huge logistical challenges to vaccinate the global population.
For the economy, the vaccine announcement should increase the probability that consensus 2021 expectations of +5.2% global real GDP growth are met1. At the very least, the most vulnerable parts of the population can be vaccinated reducing the need for governments to implement economically damaging national lockdowns. The vaccine should also allow pandemic-hit industries, such as hospitality, travel and leisure, to slowly recover.
Major central banks are expected to remain dovish on monetary policy and governments supportive from a fiscal point of view. A strengthening and broadening macro backdrop with increased visibility is likely to be positive for global equities. The MSCI All Country
World equity index has already returned 64% (including dividends) from its low this year on the 23 March2 in anticipation of a strong rebound in 2021 and is already above pre-COVID levels, but we feel there is further to go. The improving economic situation is less conducive for long-term government bonds. Since the recovery in equities this year, total returns for both 10-year UK Gilts and US Treasuries have been broadly flat. Looking forward, we expect equities to continue to outperform bonds.
Opportunities in the divided states of America
Barring Republican lawsuits that substantially change the vote count in key swing states, Joe Biden is heading to the White House on the biggest turnout ratio since 1900. However, the new Democrat president will enter office on 20 January with a highly divided nation across gender, racial, demographic and educational lines. These divides have been made worse by the pandemic. There is also increasing wealth creation divergence between urban and rural communities. Data from Brookings, a US-based non-profit public policy organization, found that Joe Biden’s 76m votes came from predominantly densely populated urban areas that account for 70% of GDP, up from 64% under Hilary Clinton in 20163, with the GDP share difference coming from largely Trump supporters in suburban and rural areas.
While the gap in the popular vote was bigger than four years ago, the presidential race was tighter in the electoral college system; Biden won by 50,000 votes in Wisconsin, Georgia and Arizona, compared to Trump winning by 77,000 votes in Pennsylvania, Wisconsin and Michigan in 20164. These small margins of victory, along with the income inequality in the urban-rural areas, probably go some way to explain why the last two elections have been so acrimonious and point to long- term risks in the stability of the country.
Democrats will be disappointed that the “Blue Wave” of winning the White House and control of both houses of Congress predicted by some polls did not materialise.
In the House of Representatives, Democrats maintained control, but lost seats. The Democrats failed to win control of the Senate, where Republicans can now block key parts of Biden’s pre-election agenda (i.e. raising taxes to pay for increased fiscal spending). That said, the Democrats do have a second opportunity to gain control of the Senate, if they win the two run-off elections in Georgia on 5 January.
In terms of investment themes, our initial thoughts from a Biden presidency are that:
- A split Congress will be seen as a positive for stocks, since it reduces the risk of corporate tax increases and concerns over potentially business unfriendly ideology from the left of the Democratic party (i.e. restricting share buyback policies);
- Renewable energy should benefit from the president- elect’s symbolic promise to re-join the 2015 Paris climate accord and use of executive authority to impose greater regulatory pressure on non-renewable energy and emissions.
- Emerging Asia should gain from an expected multilateral approach by the US over trade policy, compared to Trump’s policy to impose ad hoc tariffs on China.
- The tech sector may struggle to maintain its recent market leadership. On historically high valuations, there is an added risk that the new administration looks to rein in the sector through tighter regulation and anti-trust interventions. This may leave the sector vulnerable to profit-taking.
While positive long-term investment themes will provide a tailwind to some areas of the US stock market, we remain cognizant of the risks of political deadlock. On a risk-to-reward basis, we see more opportunities in non- US equities and particularly in the UK, where valuations are less demanding. The risk of the UK leaving the EU without a trade deal has probably fallen after the US election. Joe Biden has said that his administration will not agree to a trade deal with the UK if the Good Friday Agreement is undermined. PM Johnson will not want to risk failing to achieve a trade deal with either the US or the EU, particularly given the economic pressure already faced by the country from the ongoing Coronavirus pandemic.
1 Bloomberg, data as at 17 November 2020
2 Refinitiv, data as at 25 November 2020
3 Brookings, Biden-voting counties equal 70% of America’s economy. What does this mean for the nation’s political-economic divide? Mark Muro, Eli Byerly Duke, Yang You, and Robert Maxim, 10 November 2020
4 There’s a strategy behind Trump’s sulking, Gerard Baker, The Times, 12 November 2020
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Please remember investment involves risk. The value of investments and the income from them can fall as well as rise and investors may not receive back the original amount invested. Past performance is not a guide to future performance.