The final quarter of 2020 was as eventful as its predecessors in the year – albeit a much more buoyant one for equity investors. Two major events dominated the news in the fourth quarter and came in quick succession early in November: the US election and the announcement of the first vaccine in the fight against COVID. The latter was the big win for stocks that (like us all) were beginning to suffer from COVID-fatigue. Unlike the rally in the second quarter which was focused on a small subset of the market – notably technology and healthcare – the vaccine news led to a large market rotation into more cyclical names that the pandemic had hit the hardest.
It is clear that vaccine progress is now a key driver for markets. The speed with which they have been produced, alongside the efficacy that has been achieved, is nothing short of remarkable. Now it is about distribution. COVID cases began soaring again in December – particularly in Europe and the US - new strains and the colder weather fuelling the spread. In recent months markets have been able to look through this with hope on the horizon for a large scale and effective vaccine roll-out. There may, however, be pockets of equity market volatility as investor sentiment ebbs and flows on latest lockdown measures and hockey stick charts cross the news wires of new infections. This could lead to investors favouring in the first few months of this year similar assets that did well in 2020 – stay-at-home stocks, Asian equities and precious metals.
Despite the deep recession experience in 2020, global equities finished the year at record highs, fuelled by demand for (now significantly over-valued) technology and equivalent “growth” stocks. The UK market, which is often regarded as a cyclical bellwether, fared poorly in 2020, ending the year in negative territory even after a strong rebound late in the year. But we think the rally in the UK market, seen in Q4 2020, could continue when economic activity ramps up in the Spring as value stocks (e.g. materials, energy, industrials, financials) make a sustained resurgence. Changes in the leading sectors (e.g. growth stocks to value stocks) are common arising out of recessions, with value tending to outperform in the early stages of recovery. Given the extent of the long-term underperformance of value stocks, we think the initial move in November has further to run in 2021.
We begin the year relatively neutral on risk assets – looking to build up stocks that favour the economic recovery and a reflationary environment as opportunities present themselves.
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