Market Insights – October 26, 2020

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

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Essentials

Industrial metals – and especially copper – are continuing on their uptrend, reaching their highest level in more than two years as demand picks up and inventories remain low. Prices are still very far from their all-time highs, however.

The eurozone’s PMI dropped to its lowest level in four months. Growth in the manufacturing sector was not enough to offset the continued weakness in the services sector in the wake of new public-health restrictions. The second wave of the pandemic will have a negative economic impact, which should prompt governments and the European Central Bank to ramp up their stimulus.

More than a quarter of S&P 500 companies have released their Q3 earnings figures, with close to 85% of them beating analysts’ forecasts. This set the stage for US stock markets to outperform last week. Investors will have to be careful not to become overly optimistic, or even complacent, given that the economic recovery is still fragile.

A game changer on the forex market

The US dollar has lost a lot of ground in recent months. For a long time, the USA’s high interest rates were enough to offset the impact of the country’s twin fiscal and trade deficits. But the Federal Reserve’s aggressive response to the public-health crisis has upset that fragile balance. The Fed’s zero-interest-rate policy and massive liquidity injections have reduced the dollar’s appeal. What’s more, the deficits have expanded considerably this year. But when the greenback loses ground, a large number of other currencies usually pick up. The first to do so was the euro – it gained close to 10% over the summer, as investors’ optimism was boosted by the eurozone’s large-scale rescue plan. And this confidence in the single currency does not seem to have been shaken by the second wave of COVID-19 infections currently sweeping across the continent. Other currencies have also followed suit recently, starting with commodity currencies, which often do well when the global economy is picking up speed. The Canadian, Australian and New Zealand dollars are all back at or above their early-2020 levels against the greenback, after dropping sharply during the spring lockdowns. But the yuan is the real star of the moment. It has been buoyed by China’s robust economy, which looks set to be the first to return to growth. The yuan is back at its June 2018 levels and has wiped out the impact of the US-China trade tensions. Following the yuan’s lead, other Asian currencies are starting to wake up. And having been dragged down by the COVID-19 pandemic, more emerging currencies should pick up, especially if a vaccine becomes readily available soon. This should be the case for Latin American currencies like the Mexican peso and the Brazilian real. Among the world’s major currencies, the ones that are struggling most against the US dollar are pound sterling, which is still being weighed down by fears of a hard Brexit, and the yen, since the Bank of Japan is working hard to rein in its currency after close to 30 years of deflation.

Switzerland: The tree that hides the forest

While Switzerland and its economy were not left totally unscathed by the public-health crisis, they proved more resilient than their European neighbours. Yet Swiss stock-market indexes lagged behind over the summer, with investors preferring more cyclical regions and sectors that are more likely to be lifted by the uptick in global economic growth. This apparent underperformance hides the fact that small and mid caps have performed very well since March. While the Swiss market’s defensive heavyweights – and therefore its indexes too – are lagging behind, the same is not true for small caps, which have been boosted by the economy returning to normal and by the good newsflow in the third quarter. Our increased exposure to this market segment has therefore paid off in recent months.

But the gap between these two segments is now so wide that we think it would be good to return to the stocks holding the indexes back. Pharma, luxury goods and financials are all sectors that could end up back in investors’ good books over the coming months. Given the mixed stock-market performance over the past six months, we continue to prefer Swiss stocks and have increased our exposure so that we can tap into their catch-up potential. Swiss stocks are also very attractively valued, particularly when compared with global equities, which are more expensive since their sharp rally.

 

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