i-Wire: And then there was light…
If we believe that tomorrow will be better, we can bear a hardship today. (Thich Nhat Hanh, Vietnamese spiritual leader)
In this most depressing and challenging of years we have had a week which has finally brought us some hope with the announcement of the Pfizer vaccine study results as unexpected as it was welcome. The dedication, innovation and determination of the global biotech and pharmaceutical industries to produce a whole array of vaccines and prepare for the vast logistical challenges of worldwide immunisation is both humbling and inspirational. Once again, our appreciation of who are the true ‘key workers’ in our society has become self-evident. The vaccine will make little difference to the challenges we face this winter but is a beacon of hope for the spring and beyond. Turning to politics, it is not our role to exhibit personal preference but we suspect most of us will be pleased to see the back of Donald Trump and his chaotic, abrasive and divisive style of government. We welcome instead President-elect Joe Biden who we hope will heal social divisions at home and restore the US’s traditional moral authority and leadership abroad. One senses also that the departure of Dominic Cummings could pave the way for a more consensual, and hopefully more competent, government in the UK, even to the point of finally agreeing a last ditch trade deal with the EU.
The iWire we sent out a couple of weeks ago was written as we entered lockdown in the UK and as votes were being cast in the US. We noted that it was a uniquely challenging time for markets, admittedly with upside as well as downside outcomes but the tone of the note was fretful and nervy, in keeping with the mood of this year. This proved to be the darkest hour before dawn, maybe not a full dawn but at least a strong morning light on a horizon that is no longer quite so distant.
US Election: Glass Half Full
The Trump legacy will be debated for years to come and is a profound one, with the closeness of the election showing the appeal of his message to so many Americans. Indeed, if not for Covid Trump would now be preparing for a second term with the economy in good shape and corporate America enjoying his tax cuts. Trump broke the mould with his attack on the liberal doctrines that had dominated US and global political, business and social behaviour for decades and was at the vanguard of the populism, economic nationalism, anti-globalisation and anti-immigration stance that have taken such a hold across so many countries. America is a much more inward looking country than it was four years ago, and this will not change quickly.
In the short-term though all is golden, we may not have had a Blue Wave but Trump is gone, stability and predictability are back in the White House and the market is applying a ‘glass half full’ approach to a split Congress. The markets are applauding Biden’s more conciliatory tone and the easing in global political tensions alongside the more dovish policy on taxation and regulation he will need to get legislation through Congress. For now markets are turning a blind eye to the possibility of four years of policy impasse and gridlock and maybe the rancour and bitterness we saw in the Obama years. There will be more predictability in trade and foreign policy but there was always a bi-partisan opposition to China so trade tensions will remain, albeit conducted in a less aggressive manner. Greater regulation is possible for many sectors, notably technology and financials, but large-scale fiscal stimulus and public investment, large tax rises, and ground-breaking healthcare and climate related legislation would not get through Congress. Tax and spend will be idling in second gear, not gunning at full throttle. In any case, Biden knows his first year will be dominated by fighting the pandemic, with the US in terrible shape, and in finding a bi-partisan way to prop up the economy and prevent a renewed recession. Dreams of a green revolution and a progressive redistribution of wealth aren’t even in the kitchen, let alone on the backburner for now.
Pfizer Vaccine: Cup Overflowing
The financial markets applauded the US election result and when the announcement of the Pfizer vaccine was made they leapt to their feet, cheered wildly and invaded the pitch (in a socially distanced and be-masked manner of course). There was a ‘melt up’ to use that rather jarring modern expression, especially in the areas of the market which had taken the hardest kicking by the pandemic. The residents of the penthouse and the outhouse have swapped their living quarters, at least for the short-term, in a most extraordinary example of short-term stock rotation. The last shall be first and the first shall be last. So, while technology and ecommerce stocks fell from grace the leisure, retail and travel stocks and the economically cyclical energy, miners and industrials surged upwards. Last week the MSCI World Energy sector rose by 13% whereas the Technology sector actually fell by 0.2%. Home delivery poster child Ocado saw its stock price fall by 20% after nearly tripling since March whilst BP was the reverse with a 20% rise in a couple of days having fallen 60% this year. The value/growth rotation played out geographically as well, with this year’s pariahs the UK and European indices gaining by around 14% thus far in November, whilst the S&P 500 has risen 9% and the MSCI Emerging Markets 7%. Across all asset classes ‘risk on’ beat the safe havens. Government Bonds fell whilst High Yield had a field day, oil soared but gold fell and sterling outperformed the US dollar.
But will this euphoria last? The vaccine news is a huge step forward towards controlling the pandemic and ending social mobility restrictions, thereby hastening the re-opening of the global economy, not least because the Oxford University/AstraZeneca and Moderna vaccine trials are also progressing well. The rise in markets was merited but we suspect there may be some consolidation before another strong upward move. The vaccine is not a silver bullet promising an imminent return to normality, its long term efficacy is still unproven and the logistics of worldwide immunisation an immense challenge. The pandemic is still raging, not least in the US, and the global economy is a long way from a meaningful and robust recovery. Over the long term the huge burden of public debt accumulated to bail us all out is going to restrict future government spending, notably when interest rates eventually rise and with them the cost of servicing the debt. That however is not todays’ problem, nor probably for quite a few years hence, and it is usually a mistake to be too fixated by ‘long term macro concerns’ given the adaptability of businesses and their ability to thrive in even the most challenging conditions.
Markets tend to reward optimists rather than pessimists over the long term and we now have cause to be optimistic again.
At the sector level we don’t envisage a speedy reversal of the growth/value trade either. Interest rates will remain low for several years and the structural changes in how we live and work brought about by the pandemic favour many of the growth sectors, notably technology and healthcare. There was also a technical element to the volte-face in sector and stock behaviour with the growth stocks being overbought in the short-term as ‘the only story in town’ and the value stocks unloved and abandoned to the point that short-covering may also have fuelled their rocket like recovery. What this week does clearly show is the need for a diversified portfolio encompassing a mixture of different assets and a range of investment ‘style factors’. There will be tilts and biases towards favoured assets, sectors and geographies but we manage your wealth for the long term in order to meet your lifetime financial planning objectives with an eye to capital preservation as well as upside capture. We do not try to predict binary outcomes in politics or public health, instead constructing resilient portfolios to best prepare for all eventualities.