BENDURA Analysis & News
As expected, the US election was not without friction. In the previous issue, we expressed hope that the winner would at least be announced, as markets detest uncertainty. So where are we now?
On the one hand, Trump is still waging a legal war, as he believes the election was rigged. On the other hand, it has long been clear, with compelling evidence, that he lost the elections. As often seen before, the markets have done a great job to reassess the odds during the election period. However, some market participants were surprised to see technology and energy stocks soar, as many believe these sectors only rise in the case of a Trump win. Was everyone wrong, including us, in last month's issue?
Not necessarily. The crux of the matter was that it became apparent early on that the Democrats would not win Congress over completely (the so-called blue swipe), but that Biden will most likely have to deal with a split congress. Without full control over the congress, it will be difficult to pass new laws that would have harmed the big tech corporations. So overall, the markets celebrated the results of the elections even before they were really over and embraced the prospect of a more predictable future with Joe Biden, but without the danger of economically detrimental new laws.
As this wasn't exciting enough, Monday after the elections featured breaking news that Pfizer's vaccine is highly effective against the corona virus. Once again, market participants had to realign the world with that news. Within just a few minutes, an unprecedented rapid sector rotation took place: out of technology and into cyclical values.
Due to all this, November has been a highly volatile month and it was fascinating to observe how the markets had to price these fundamental shifts in world society and politics.
On the following pages, we offer an overview of each of the most important asset classes and give our assessment on the future developments.
US Treasury yields rose prior to the US elections and continued to grow after encouraging news of a COVID-19 vaccine emerging. The US Congress is likely to remain divided, which means that the prospect for substantial fiscal stimulus will dampen in the short term, and the focus will probably shift to central banks. These are likely to keep monetary stimulus high by keeping short-term rates low and increasing asset purchases to support the economy. Nevertheless, we think that government bond yields have additional upside potential for longer maturities and see a probable reacceleration in the global economy next year, with medium-term inflation and bond supply as the most important risk factors. Thus, we still expect a moderate steepening of the curves and consider government bonds as unattractive.
In a portfolio context we underweight government bonds. At historical low rates, they no longer offer a strong hedge for riskier assets, as central banks have limited ability to cut interest rates much further.
We maintain a short-duration stance in the USA, the Eurozone and Switzerland and continue to favour US inflation linked bonds relative to nominal US government bonds.
Investment Grade Bonds
We keep an overall positive outlook on IG credit, which remains the most direct beneficiary of the central banks’ accommodative stance through credit facilities. We favour cyclical exposure at the 7–10 year maturity bucket, and see more opportunities in cyclical IG hybrids such as the automotive sector.
High Yield corporate Bonds
We maintain our positive view on HY. With a divided US government scenario now being the most likely outcome, we think the size and scope of the next US stimulus might be more limited and possibly postponed in time. Yet, even a modest fiscal stimulus should improve the default outlook going into 2021.
Emerging Market Bonds
The asset class has not only coped well with the uncertainty related to the US presidential elections, but it has regained momentum in the aftermath on expectations that the new US government will have a less confrontational approach to foreign policy.
Emerging Europe, Middle East and Africa (EEMEA) remains our preferred region.
We maintain our attractive view on global equities. The asset category offers the most attractive medium-term return outlook, as companies have weathered the lockdown-driven economic contraction fairly well, central banks retain a strong supportive stance to overcome the COVID-19 crisis as we are closing in on available mass distributed vaccines. Nonetheless, volatility is likely to remain elevated until a vaccine is available.
Developed market equities
In developed markets (DM), we no longer expect Swiss equities to outperform, as defensive growth segments are at risk. This leaves us with a preference for the more cyclical German equities.
We no longer prefer the IT sector, as we expect sector-rotation to continue. With markets watching the post-covid era, we therefore overweight cyclical industries. We favour stocks in the Automotive, Insurance, Aviation and Tourism industries, especially those battled down during the pandemic while maintaining sound fundamentals and a strong market positioning for the post-pandemic world.
Simultaneously, we keep our positive stance on the healthcare sector, which offers an appealing combination of solid earnings, attractive valuations and intact growth prospects.
Emerging market equities
We rearrange emerging market equities to overweight, as robust growth and improving earnings in Asia - particularly in China - are encouraging, and the economic outlook looks better for most other countries in emerging markets as well. In addition, a weaker US dollar should prove positive as well. Asia remains our preferred region within global emerging markets due to its superior growth momentum and the heavyweight, China, has brought the virus under control.
After a strong rebound in Q2, oil has been consolidating, though in a very volatile way. Reduced mobility in response to rising COVID-19 cases has led to a downgrade of demand, while Libya has increased its production, which has led to slower inventory development. That said, we believe the downside risks are mitigated by OPEC+, which is likely to delay their planned output by 3-6 months. As supply is still limited and demand will continue to recover, we see a renewed upside when equities are closer to the average levels again (2H21).
Gold, which remains heavily dependent on investor flows, is consolidating in a wide range around USD 1900. With a likely split US Congress, the scope for a large fiscal package remains unlikely, which suggests that the burden of further stimulus falls on the Federal Reserve (Fed) again. This is bearish for the USD, according to FX strategists, while nominal yields should remain anchored, providing a favourable backdrop for precious metals. A potential vaccine would stimulate higher industrial activity and eventually lift inflation expectations, pushing real yields lower. However, we do not consider it an immediate catalyst for gold.
Silver, on the other hand, is likely to outperform during phases of accelerating industrial activity.
We retain a neutral view on global listed real estate. Valuation multiples are undemanding when compared to global equities and low interest rates are encouraging, but then again, structural concerns are likely to persist beyond a vaccine.
Despite the recent rotation, we believe that the trend toward increased online shopping is structural and likely to persist in the longer term, even in case of a successful vaccine rollout. We therefore keep our preference for logistics real estate, which should continue to benefit from strong distribution demand for warehouses from online retailers.
Regionally, we reduce Swiss Real Estate to neutral, although it remains the only sub-asset class within Real Estate with a positive YTD performance. Nevertheless, we expect them to perform in line with the global benchmark over the coming months, as valuation multiples are elevated and the funds are currently trading at an average premium to net asset value of 29% (vs. 10-year average of 25%).
The USD has been volatile during the US presidential elections. A divided US government is probable, but it can still provide stimulus packages, although more limited and slower. Potentially less fiscal support requires an accommodating Federal Reserve (Fed) that should be prepared to expand the stimulus if necessary. Accordingly, we do not see any rate support for the USD on the horizon. As we have argued, the Fed’s new policy framework increases the prospects of stable to lower US real yields. Given that the US twin deficits remain the largest among major countries, the USD should adjust to lower levels in the absence of higher real rates. We continue to advocate diversifying of the USD. Currently we prefer EUR over USD, as the Eurozone tail risks have receded considerably with the comprehensive EU budget and recovery fund agreement. Despite some widening fiscal deficit, EU structural external balances are sound (3% surplus on average over the last 5 years) and real interest rates are set to remain supportive. The European Central Bank (ECB) will likely expand its policy support via asset purchases and refinancing operations in December, but should refrain from lowering short-term rates. As such, we do not anticipate an outright negative policy impact on the EUR. The common currency should stay supported beyond the short term COVID-19 led growth slowdown. Our EUR/USD targets are 1.22 in 3M and 1.25 in 12M.