With the US Presidential election effectively settled, coronavirus is again the main driver of global equity markets. As such equity market volatility has remained elevated thanks to the continuing tug of war between increasing coronavirus infections and the risk of tighter lockdown restrictions on one end; and coronavirus vaccine developments and the potential for further economic stimulus on the other.
For example, on Monday (16 November 2020), Moderna, a US biotechnology company) announced that its coronavirus vaccine was 94.5% effective – and this taken together with last week’s positive news from Pfizer (please see here), helped equity markets continue their sharp rally, especially as Moderna’s vaccine has fewer logistical challenges than Pfizer’s vaccine.
However, those gains have been pared slightly both today and yesterday (Tuesday 17 November 2020) after lockdown restrictions were reimposed in a number of US States.
Despite the fact that we have a challenging few months ahead given the rising number of deaths and near-term challenges for hospitals as we approach the winter period, we believe that vaccine optimism will win out, given the potential for economic normalisation sometime in 2021.
While our optimism may be considered premature given it will take time to roll-out a vaccine, meaning that we must continue to live under a coronavirus Sword of Damocles, there is thankfully light at the end of the tunnel. In fact, we believe it is actually only a matter of time before a strong and sustainable economic (and therefore equity market) recovery is in full swing, especially given the political aversion to severe lockdowns (even Joe Biden’s advisers think a nationwide lockdown is too blunt), coupled with the fact that interest rates will remain low for many, many years.
Furthermore, economic data so far this week indicates that the global recovery is still ploughing ahead despite the rise in coronavirus infections and localised lockdown restrictions: Chinese factory output, fixed-asset investment and retail sales all rose, while the jobless rate fell; Japanese Q3 GDP grew at an annualised rate of 21.4%; and although the US retail sales reading for October came in a tad lower than expectations, suggesting that the recovery is moderating, its year-on-year increase was still very impressive at 6%.
However, despite this, unfortunately in the very near-term we will continue to take two steps forward and one step back as equity market volatility is likely to remain elevated.
Investment Management Team