Monthly Market Commentary: January 2021 – Record Differentials
Global equities returned nearly 5% in December, making
a Q4 total of 15% in local currency terms. However, for
UK based investors, sterling’s appreciation to $1.37 on
dollar weakness and the Brexit trade deal reduced this to
9%. A change in sector leadership helped the FTSE 100
rise nearly 600 points to 6,460 while more economically
sensitive medium and small companies were up 18% and
23%, respectively. Asian markets were notably strong
over the quarter.
The global equity return in 2020 was 14% but the UK fell
10% – the largest differential ever recorded. The US and
Asia Pacific (+17%) outperformed with emerging markets
gaining 12%, Japan 11% and Europe 9%. This principally
reflected higher valuations rather than increased profits
or dividends. Globally, profits fell around 14% with a
marked difference between developed and emerging
economies as well as intra-region. China, Korea, Taiwan
and India recorded earnings per share increases between
10%-25%. While US earnings (-10%) fared relatively well,
the Eurozone was down 28% and the UK down 34%.
There were also widespread gains in fixed income as
further quantitative easing measures and asset purchase
programmes combined with rising equity markets saw
investment grade credit generally perform better than
high yield credit and government bonds. Longer-dated
index-linked outperformed. The UK 10-year gilt yield
declined 60bps and closed at 0.2% – close to its 2020
low. Economically sensitive commodities like copper
rose as the outlook improved but the sharp contraction
in global trade and lack of production discipline meant
that, despite strong H2 gains, Brent crude ended the
year down 26% at $51. Gold closed higher as investors
sought an event risk hedge and an alternative to
bonds where yields are, in some cases, negative.
Financial markets started the year expecting “Phase one”
of the US/China trade deal to extend an uninterrupted
ten years of global economic growth. However, within
two months, coronavirus had begun to spread rapidly
with the World Health Organisation declaring a pandemic
in mid-March and government shutdowns of businesses
and non-essential activities triggering the steepest global
recession in generations. Trade grounded to a halt and job
losses accelerated although unemployment rates in many
countries were flattered by furlough schemes and other
income support measures. The economic collapse would
undoubtedly have been far greater were it not for central
banks’ unprecedented monetary policy response and
government fiscal rescue packages with the latter pushing
the ratio of public debt to GDP over 100% across the OECD.
Despite the economic trauma and dramatic swings in
sentiment, equity markets rebounded from the March
meltdown until concerns about a second wave in early
September raised doubts about the sustainability of the
recovery. After a period of rising volatility ahead of the US
election in early November, the outcome – albeit contested
by President Trump – combined with further monetary
and fiscal stimulus and positive vaccine news resulted
in a strong year-end rally with some markets reaching
new or multi-year highs. Given the year-end backdrop
of a new strain of the virus, accelerating infection rates,
record hospitalisations and deaths, investors appear to
have placed unquestioning faith in the vaccine solution
even though the logistics of mass inoculation mean herd
immunity is unlikely to be achieved before Q4 2021.
Global GDP is expected to have declined by 4% in 2020
with a significant gap between advanced (-5.4%) and
emerging economies (-2.2%). China (+2.2%) was the only
major economy to grow in 2020 but the US (-3.4%) fared
relatively well against Japan (-5.1%), the Eurozone (-7.3%)
and the UK (-11.2%). Consumer services were particularly
hard hit during the pandemic and continued to contract
in Q3 so – while recovery can be expected in 2021 – this
will be asynchronous and the global economy may not
regain 2019 output levels, let alone revert to trend, until
mid-2022. Short-term estimates are little changed and
positive vaccine news has been largely offset by the as yet
unquantifiable impact of second and possibly third waves
in tandem with growing unemployment. China is leading
the recovery with the US seeming likely to follow but the
timeframe for the Eurozone and UK has been extended –
not least because the last minute Brexit deal is expected
to mean less certain trading access and frictional costs.
The pandemic recession, lower oil prices and higher
unemployment resulted in low consumer price inflation
(CPI). Notably, advanced economies which recorded
CPI figures of 0.7% were significantly below the 2%
global average and central bank targets. As it will take
several years for many to return to trend growth, a
sustained pick-up in inflation appears unlikely although
further lockdowns could distort 2021 data. While some
investors fear that financial asset and housing inflation
will feed through more directly, we expect the bursting
of these bubbles to weaken future growth rather than
increase CPI – Japan being an obvious precedent.
In developed markets, technology was the best performing
sector with US technology indices – dominated by a
handful of transformative digital companies – rising
over 40%. Towards the end of the year, there was some
rotation from growth/momentum/quality towards cyclical/
value that helped industrials, especially in Europe and
Japan, as well as financials and energy. Higher yielding
equities had a particularly challenging year – notably in
the UK where a combination of dividend suspensions and
significant resets meant income fell by around one-third.
The magnitude of the economic collapse, the policy
response and the launch of vaccine programmes have set
the scene for a significant recovery in 2021. While equities
continue to look the best value as bond yields are so low,
a degree of caution appears warranted with sentiment
and positioning indicators suggesting over-euphoria at
the prospect of the start of a new economic cycle.
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