December 2020 / ASSET ALLOCATION VIEWPOINT
Global Asset Allocation: The View From The UK
Discover the latest global market themes
As of 30 November 2020
Digging for Value
Promising news on COVID-19 vaccines has triggered optimism for a return to normal next year, buoying deeply cyclical segments of the market that have been the hardest hit by shutdowns. November saw a strong rebound in many of these unloved sectors, including materials, energy, financials and industrials. Following a period of meaningful underperformance, a significant beneficiary of the abrupt rotation away from technology-heavy growth sectors has been emerging markets (EM) value stocks, which have more than 50% exposure to these sectors. Expectations in 2021 for unleashed pent-up global demand, increased fiscal spending, aggressive monetary policies and higher energy prices could provide a strong backdrop for cyclical companies in EM. An additional boost could come from a rebound in EM currencies, as they face less depreciatory pressure versus the US dollar. Ignored for nearly a decade, EM value companies may finally see more interest from investors as they dig for cyclical opportunities with very attractive valuations.
A wave of defaults across some highly rated—including AAA—Chinese companies with perceived state support have shaken local markets causing investors to reassess risk in the growing Chinese bond market. The Chinese corporate bond market has grown substantially over the past decade since the global financial crisis as China sought to open its capital markets to foreign buyers and increase its representation in the Bloomberg Barclays Global Aggregate Index. Although there were signs of bond market weakness heading into the coronavirus pandemic, China policymakers were forced to pull back on credit reform initiatives as economic conditions deteriorated, temporarily masking potential solvency issues. However, with the recent improvement in economic growth, policymakers have begun re-tightening financial conditions, exposing the overhang of weak corporates, many of which have been kept alive by forbearance. Chinese authorities may see the current economic strength as an opportunity to clean up weak companies, which, in the long run, could improve the perception of Chinese corporate credit markets.
After Democratic candidate Joe Biden won the US presidential election and Democrats retained control of the House of Representatives last month, markets seemingly cheered the prospects of a split government, with the US Senate likely to remain controlled by the Republicans. However, the balance of power remains uncertain, hinging on the result of two very close runoff elections in Georgia on 5 January 2021. If Republicans win either of the Georgia runoff races, they will retain control of the Senate. However, if they were to lose both seats to the Democrats, the result would be a 50/50 split in the Senate with the tie-breaker vote going to the new vice president, tipping power in favour of the Democrats. With Democrats in control of the presidency, House of Representatives and Senate, markets may begin to factor in the likelihood of more progressive policies on taxes and tighter regulation. Given the market’s strong rebound in November, driven by positive vaccine news and prospects for a balanced political environment, the market could be in for a negative shock.
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