P1 Investment Commentary – November

P1's monthly review of investment markets, politics and the pandemic.

3 minute read

We firstly look at the equity markets that ended in November significantly higher and the economic outlook has been meaningfully improved following a series of positive COVID vaccine announcements and the passing of the US election. Most global equity markets were up over 10% in the month and investors rotated away from the safe-haven assets such as government bonds. Far more importantly, there has been a palpable change in equity market leadership, which has been dominated this year by high quality, technology focussed stocks that are better placed to ride out the pandemic. However, with the potential return to normality brought forward, those companies that have been hardest hit have seen the strongest rallies in their share prices during the month. Geographically, this has helped markets such as the UK and Europe which have a lower weighting to technology and higher cyclical exposure (financials, energy, industrials).

While market participants were broadly aware that there were several promising vaccines in development, the likely speed of deployment and effectiveness of the vaccines now announced was well above even the most optimistic expectations. There was also uncertainty over whether an immune response could be induced from a vaccine, and how long this would last. The completion of three separate large-scale trials gives high confidence that this is the case and resultingly improves the likelihood that more positive news from other vaccine developments will follow.

It is now expected that the first high-risk citizens and front-line workers will be vaccinated in a matter of weeks and with production already massively scaled up the rest of the population will follow soon after. It may take longer for vaccines to be deployed across many emerging market economies, however, the key for markets is that the US and Europe may no longer have lockdown measures that are particularly damaging for company prospects.

With an effective and fully deployed vaccine, there is also the prospect of a much more complete return to normality which has the biggest effect on some of the most discounted areas of the market, such as those involved in tourism, hospitality and retail among others. There may also be a slight negative impact on those companies who have thrived in the move to online shopping and remote working. Those companies that are able to survive within struggling industries may find themselves in a strong position next year, with less competition and customers eager for a return to normal. While there is still a long way to go and a vaccine rollout is not without pitfalls, the outlook has been greatly improved by these announcements.

In the US, voters went to the polls at the beginning of November for the widely broadcast Presidential election.  The initial market reaction to the outcome was puzzling as the narrow margin of victory for Biden was flagged as the worst outcome for markets. The lack of control in Congress means that any stimulus measures are likely to be watered down and a narrower victory leads the result more vulnerable to challenge from the Trump campaign and therefore continuing uncertainty, something that continues one month on. Nevertheless, it appears that the overriding sense that this risk is now in the rear-view mirror has led many investors to deploy cash that was sitting on the side-lines.

Overall, the outlook for the economy and markets is greatly improved, as is investor sentiment. While some have called the market move in the last month an overreaction, the rally seen in many of the hardest-hit shares is only a fraction of that lost in the March selloff and could still be further to run. Of course, there are potential unknowns that could derail the recovery from here, however, the prospects are more positive than at any time since the outbreak began.