Market Insights – December 14, 2020

Each week, a team of experts shares its market views with you!

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Essentials

Alternative funds were able to fully tap into November’s market rally. They are continuing on the uptrend that began in April and will record a solid rise over the year.

Year-on-year growth in Chinese exports picked up sharply, reaching 21.1% in November. That’s primarily attributable to strong demand for lockdown-related products following the second coronavirus wave in a number of developed countries. Despite the US-China trade tensions under the Trump administration, China has a record USD 37.4 billion trade surplus with the US.

December’s Tankan survey showed that business confidence in Japan is continuing to improve more quickly than expected, especially in the manufacturing sector. However, the outlook survey points to a downtrend in the services sector, reflecting concerns about the impact of a third COVID-19 wave.

Extreme repression!

The year 2020 has been unprecedented in so many ways, and the global bond market is no exception. It will end the year with record negative yields. We’re not talking about negative performances – almost all bond market segments will end the year in positive territory, starting with US government bonds, which have risen close to 8% this year. But at the moment, the market is rife with bonds that are trading with negative yields. In fact, the world’s pile of negative-yielding debt has now hit a record USD 18 trillion. It’s something that Swiss investors have been familiar with since the Swiss National Bank removed the floor rate against the euro in 2015 and adopted negative interest rates to discourage foreign investors from buying up Swiss francs. But now it’s not only Swiss government bonds that have negative yields – the majority of European governments are also issuing debt at negative rates, including some Mediterranean countries whose financial stability was considered questionable not so long ago. What’s more, negative yields have spread beyond sovereign debt and are now affecting some corporate bonds as well. There are many reasons for this rare phenomenon, one of them being persistently low inflation. But above all, it’s because of what central banks have been doing. They’ve adopted ultra-loose monetary policies in order to boost the global economy, which has been shaken by the public-health crisis. The major central banks have kept interest rates abnormally low to discourage people from saving, spur investment and risk-taking, and improve conditions for borrowers.

This is called financial repression. But this strategy has now run its course and is likely to be gradually reversed in the months ahead. The distribution of effective vaccines has just begun, which should lead to an upturn in economic growth. And that upturn could actually be quite sharp, given the massive amounts of money that have been injected into economies. Previous crises show that flooding the economy with money often has a delayed impact that can last well after central banks start turning off the tap. Once markets begin pricing in the end of financial repression, bond yields are likely to increase. We expect that to happen gradually, but we will be keeping an eye out for any unexpected rise in inflation in 2021, which we hope will be the year when both the economic and public-health situations return to normal.

Europe – major progress overshadowed by Brexit

The European Central Bank’s latest round of measures were much-awaited, and on the whole they didn’t disappoint: the ECB will increase its pandemic emergency purchase programme by EUR 500 billion and extend it until March 2022. This was a necessary move designed to ensure that the right financing conditions remain in place until herd immunity is achieved through immunization and the EU recovery fund is up and running. The recent sharp rally on eurozone stock markets suggests that they have already priced in this news. They had also already been boosted by promising news on the vaccine front and Joe Biden’s victory in the US presidential election. Europe was hit very hard by the second coronavirus wave, and these developments have given investors fresh hopes that the economic recovery is just around the corner.

We think that the stage is set for eurozone stock markets to continue catching up. First, the region’s economy should bounce back sharply when the vaccines become available. And second, the EU recovery fund and budget are ready to be rolled out now that Poland and Hungary have withdrawn their vetoes. That’s a sure sign that there is a new dynamic within the European Union, with a stronger Franco-German alliance at its core. Finally, valuations are attractive compared with other regions. All that’s left is the uncertainty surrounding Brexit. Once that’s cleared up, the EU’s stars will be fully aligned.

 

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