Global stock markets rally on good news
Good news abounded in November, sending already elevated stock markets to fresh highs as two significant weights were lifted off the neck of financial markets. The uncertainty in the lead up to the US elections largely dissipated with a Biden win and news that two frontrunners in the race to get a vaccine approved had come in with far better success rates than expected lifted investor spirits.
Although Trump has so far refused to officially concede the elections to Biden, insisting that the election was rigged but failing to come up with convincing evidence, Biden has continued to prepare for his inauguration in January, building up his Cabinet and taking a compassionate and firm stance on combatting the virus.
Stock markets enter uncharted territory
Against the backdrop of these events, stock markets performed exceptionally well, with the Dow Jones Industrial Average breaking through the 30 000 level for the first time in late November and the Eurostoxx 600 Index putting in its best November performance ever.
However, we’ve still got a long way to go in fighting COVID-19. Deaths have passed the 1.5m mark globally, and the rate of coronavirus infections in the developed economies shows little sign of slowing.
As a result, there could well be setbacks along the way as the virus is rolled out. It’s also unclear how significantly the pickup in infections to daily records in the US will affect an economy that was showing signs of life again when lockdowns eased, only to see varying levels of lockdown measures put in place again, particularly post-Thanksgiving.
Europe and the UK are also battling to bring the virus under control, but news that the UK had given the emergency go-ahead to start using the Pfizer BioNTech vaccine was met with excitement. The US’s Federal Drug Administration (FDA) has been more cautious about giving their approval, but the Pfizer BioNTech vaccine is expected to be rolled out from mid-December. It is still to be seen how successful the uptake of the vaccine will be, with research indicating that only 50% to 60% of the population saying they are willing to take the vaccine.
Investors rotate into value stocks
Value stocks have been the primary beneficiaries of the rebound, enabling them to outperform growth stocks by seven percentage points in the US and 12% in Europe as of December 1, according to BNP Paribas. The reversion in the valuation of these stocks might give credence to investors relying on more traditional valuation methods to analyze businesses. Counters that were abandoned by investors because they represented the old economy, like Exxon Mobile Corporation, could find favour after being outpaced by so-called new economy stocks like Zoom and the Big Five technology stocks, which have so dominated the rise in stock markets this year.
In our last commentary, we pointed out the undervaluation that we spotted across the energy sector and have been adding generously to our clients’ holdings there. Thus far, our views on this sector have added value for our clients, and we still see value there as well highlighted in our previous commentary.
In October, we were of the view that a Biden win would be more favourable for the renewable energy sector than the traditional carbon-intensive energy sources, while a Trump win would see the fossil fuel industry better supported. We noted that, as always, there are opportunities in volatile markets but that it is essential to do your homework to avoid paying extremely high valuations for securities if you want to achieve meaningful long-term returns.
Gold on the receiving end of risk-on shift
Gold pulled back on the good news about the vaccines, falling to a low of $1,777 an ounce at the end of November. The initial selloff in the precious metal price during November occurred on the back of a shift out of safe-haven assets in response to positive economic data and expectations of more to come if vaccines are rolled out by the end of the year.
Since then the price of gold has ticked back up to $1,838 on signs that the rebound in the labour market is slowing and on concerns about the fall out of US infections continuing to reach record highs daily. Expectations are that the total deaths as a result of the COVID-19 virus could top 300 000 in the next couple of weeks.
Emerging markets find favour
The increase in risk appetite driven by the generally more favourable outlook that took hold in November has benefited emerging markets, with investors predicting that these countries could put in strong stock market performance next year. Their equities tend to be undervalued, having not participated in the rally as much as US equities.
Brazil, Russia and India have seen soaring infections since the pandemic began. However, investment opportunities are likely to open up there as the coronavirus is brought under control. Asian emerging markets show the most promise as they are already out of the economic starting blocks, having had greater success in combatting the spread of the virus than the Western developed economies and other emerging markets.
Fiscal policy to take over the reins from monetary policy
Developed market economies will, however, continue to be underpinned by the multi-trillion-dollar stimulus programmes that remain in place. During November, central banks upped the ante in their pressure on their governments to maintain an expansive fiscal policy.
In Canada, there has already seen a shift in emphasis on fiscal policy. The Bank of Canada has pared back its monetary policy activity over the last few months, while the government remains committed to doing what it takes. In the US, repeated, but unsuccessful, attempts to pass a stimulus package to replace the one falling due saw Federal Reserve chair Jerome Powell warn of the dire implications for the US economy, should US Congress fail to reach a deal before the end of the year.
In Canada, there is a concern about the extent of the government debt burden. However, there is a view that it is necessary until signs of an improving economy come through. That view is, however, premised on the need to ensure that the spending is targeted and not wasted. Interest rates are low right now so the deficit can be financed at low cost, which gives the government some leeway, but there needs to be a plan to reduce the deficit eventually.
Inflation expectations spark US Treasury selloff
In early December, the bond market began factoring in a rise in inflation on expectations that an agreement on a large fiscal package was still possible in the US. The US 10-year Treasury was closing in on 1%, a move of almost 20 basis point higher in a month.
Should inflation reassert itself, stocks of companies that can raise prices should continue to do well even in an inflationary environment. We are not particularly worried about inflation at the moment. But the caution here is that inflation could appear rather quickly and catch us off guard.
In March, as the coronavirus pandemic was unravelling markets, we avoided strategies that sought to speculate on stocks that could benefit in the short-term. Instead, we maintained our valuation- centric approach, which we believe would bear more fruit over the long-term, as well as mitigate certain risks for our investors. Again, in our previously published commentary from October, we highlighted our disciplined investment process, which we have successfully employed to lead our clients through these turbulent markets.
Garnet O. Powell, MBA, CFA is the President & CEO of Allvista Investment Management Inc., a firm with a dedicated team of investment professionals that manage investment portfolios on behalf of individuals, corporations, and trusts to help them reach their investment goals. He has more than 20 years of experience in the financial markets and investing. He is also the Editor-in-Chief of the Canadian Wealth Advisors Network (CWAN) magazine. He can be reached at gpowell@allvista.ca