Market Insights – November 9, 2020

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

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England  is once again in lockdown, at a time when the economy is still struggling to bounce back from the last one. In response, the Bank of England announced that it would increase its asset purchases by GBP 150 billion, to GBP 895 billion, in order to shore up the economy.

Growth in Chinese exports accelerated in October, reaching 11.4% year on year. COVID-19-related exports slowed slightly, but sales of home- and car-related products picked up, particularly to the US and Japan, while exports to the European Union once again contracted year on year.

The yuan continues to rally and is now trading at less than 6.6 against the US dollar. It’s at its highest level since June 2018, buoyed by the sharp uptick in the Chinese economy and the election of Joe Biden, who is likely to be more favourable towards China than his predecessor, although there will probably be geopolitical tensions between the two superpowers for some time to come.

Fading risks

So Joe Biden will be the 46th president of the United States. Donald Trump has not followed tradition by conceding the election, and he’s threatening to take the battle to the courts. We had identified a narrow victory for Biden as one of the risks for the financial markets as we head into an already turbulent end-of-year period. But the Democrat actually won the election by a comfortable margin, or at least by enough to rule out the possibility of the courts deciding otherwise. The decline in political risk was welcomed by the US stock market, which seems to be shooting for new record highs even though the public-health situation remains a major concern. However, the current resurgence in COVID-19 cases in the States has not overwhelmed the health care system or pushed up the death rate considerably. At the same time, the southern hemisphere is experiencing what is most likely a seasonal lull, Asia seems to have the pandemic under control, and the positive effects of the second round of lockdowns are starting to be felt across Europe. Authorities are still determined to keep their economies on an upward trajectory. New fiscal stimulus packages are being considered, including in the USA, and central banks in Europe and the States are getting ready to inject more cash into their economies in December.

This additional support is being brought in while we await one or more vaccines, and more news is expected on that front soon. Pfizer is in the final test phase of a vaccine, which it says is close to 90% effective. Investor sentiment has dampened a lot in recent weeks, but the stage now looks set for a year-end stock market rally. We are therefore again increasing our exposure to equities, with a preference for the economic regions that will be boosted most by an available vaccine – or vaccines. Those regions are Europe, emerging markets and the USA. In balanced portfolios, we have upped our equity allocation by 6%, with stocks now making up 45% of these portfolios. At the same time we have decreased our exposure to cash and cash equivalents. Of that 6% increase, 2% will go to the USA, 2% to the eurozone, and 2% to emerging markets, including 1% for Asia. We are, however, keeping our exposure to the US dollar relatively low, at 15%. We don’t think Joe Biden’s victory really improves the greenback’s prospects. Given the country’s growing twin – i.e. trade and fiscal – deficit, low interest rates in the US are not enough to maintain the dollar’s appeal as it continues trending downwards.

Investors welcome news of a new US president

In recent days, the prospect of an election that’s too close to call sparked fears among investors of a prolonged period of uncertainty, with legal battles or a last-minute turnaround, just like back in 2000. But in the end, it was just a short wait before the result became clear, with Joe Biden declaring victory over the weekend. The markets welcomed news that the Democrat would soon be in the White House. Investors don’t seem to give much credit to Donald Trump’s talk of challenging the outcome in several states. Stock market indexes rose last week, as the current political scenario is perfect for US equities. A change in president suggests that there will be a period of relative calm, both in terms of content and style, especially when it comes to the country’s trade relations with China. And the chances of a massive fiscal package being approved to support the US economy have increased with a Democrat president.

What’s more, economists are pleased that the Senate is likely to remain in Republican hands – although we’ll have to wait until January 2021 to know that for sure. The new president could quickly be blocked if he attempts to raise corporate taxes or tighten regulations – moves that would be bad for the stock market. Now that the election is behind us, the markets can once again focus on economic fundamentals, which are still robust. Unemployment, for instance, is falling faster than expected, dropping below 7% in October. Is everything now in place for an (almost) typical year-end rally?

 

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