The US election result provides another reason to look ahead with more confidence by reducing the political uncertainty that has overshadowed markets for much of 2020. Although Joe Biden won the race, there has been no ‘blue wave’ that many expected, where the Democrats would have controlled not just the White House but both houses of Congress too. However, Biden’s behaviour is likely to be more predictable internationally and less disruptive domestically.

In the short term, stock markets have experienced a powerful rotation into economically sensitive sectors, as investors have looked ahead to more solid growth potential on the horizon. Over the longer term they should also continue to be supported by central bank monetary policies, including low interest rates and additional liquidity, as well as government stimulus measures, which include replacing lost incomes with subsidies and transfers.

During the third quarter we dialled down risk in portfolios to reflect slowing economic growth, heightened political risk and reduced visibility about the immediate outlook. Successful Covid-19 vaccine trials and the aftermath of the US election allow us to look ahead to 2021 with more certainty, and we’ve adjusted our asset allocation to reflect our confidence.

Notably, we’ve increased our exposure to risk in portfolios by overweighting US equities, which we believe have the potential to outperform investment grade corporate bonds in today’s environment of low yields. Although it’s still early days, the path of the recovery is now more certain, even though the economy could suffer a temporary setback over the winter due to ongoing lockdowns.

We believe the macro backdrop supports equities over bonds, while price momentum on US stocks is positive and improving. In addition, the third-quarter earnings season confirmed that many US companies are on track for a healthy recovery of profits. The rather balanced sector mix between defensives and cyclicals, coupled with a large weight in the structurally supported technology sector, leaves US equities well-positioned.

The strong results from two late-stage trials of Covid-19 vaccines have fuelled a stock market rally. Yet global coronavirus cases and deaths have continued to soar. In response, national and local governments have reimposed or tightened restrictions on travel and socialising in order to slow the virus’s spread. As a result, economic activity is likely to weaken over the winter, and Europe in particular appears vulnerable to another sharp slowdown.

At this point in the recovery, we need to weigh the worsening coronavirus pandemic against hopes for potential vaccines. The early results are encouraging, although immunising most of the world’s population could prove logistically challenging, while manufacturing and distributing vaccines at scale is likely to take time. However, we believe we can look through these short-term headwinds to next spring, when the recovery should gather momentum as the economy reopens.

This stringency index records the strictness of lockdowns. Although many countries have re-imposed restrictions on socialising and travel, the measures are more moderate than they were at the start of the coronavirus crisis. Notably, it appears that our economies have adapted, so that the impact on activity is less pronounced. For example, Google’s Mobility Index has dipped, but not by nearly as much as it did back in March and April.

The high success rates of Covid-19 vaccine trials have raised hopes of a quicker recovery than previously expected. Although there are still huge challenges ahead in terms of deployment, the beginning of the end seems to be on the horizon. The news has excited stock markets, and triggered a powerful rotation into economically sensitive sectors. This shift is also a reflection of the increased likelihood that company profits and lifestyles will return to normal in 2021.

As we look forward to better days ahead, we remain committed to supporting the transition to a greener economy. There are lots of things we can do as individuals to reduce our carbon footprint, such as changing what we eat and how we travel. As investors, we can channel capital to innovative projects and technologies. To find out more about our efforts to improve the environment, watch the highlights from our recent webinar ‘For a richer planet: carbon reduction and the role humans play’.

Successful Covid-19 vaccine trials have cheered financial markets as investors look through what’s likely to be a challenging winter for the economy

A shot in the arm

COUNTERPOINT DECEMBER 2020