Summary

Market update

Unwinding of election risk and positive vaccine news took centre stage in November, with the MSCI World Index surging 12.8% over the month. Correspondingly, the VIX, used a “fear gauge” by market participants around the world, eased to 20.6 from a reading of 38 in the previous month. Investors were also emboldened by positive vaccine news from Pfizer and Moderna trials as these pharmaceutical and biotechnology companies lifted hopes of an improvement in future growth prospects.   

At this stage, the market is pricing very little recourse of the election results being overturned. In fact, emerging markets rallied by 9.2% in November, as investors likely perceive President-elect Joe Biden as an amiable alternative for bilateral trade and geopolitical relationships in China. In addition, high frequency data in emerging markets remained relatively upbeat over the course of the month. However, it is worth noting that the Senate will likely be obtained by the Republicans, although this will be determined by the Georgia runoffs on 5 January 2021. 

The signing of the Regional Comprehensive Economic Partnership on 15 November 2020 will likely provide a boost to the Asia-Pacific region as the trade pact is set to be the biggest free trade agreement in the world accounting for roughly 29% of global GDP.  

Despite upbeat market expectations heading into next year, Covid-19 cases remained elevated, particularly in parts of Europe and the US. This didn’t stop investors from rotating into a value driven strategy as hopes of an economic recovery become more tangible with a viable vaccine in sight. In fact, the MSCI World Value Index outperformed the MSCI World Growth Index by 4 percentage points, although both investing styles returned an impressive 14.8% and 10.8% respectively over the month.   
It is worth noting that commodities rallied over the month of November as the Thomson Reuters/Core Commodity CRB Index climbed 10.6%, as the reflation theme gains further traction. Even energy counters, which have remained in the doldrums for majority of the year, rebounded strongly with the MSCI World Energy Index soaring 28.2% in November – more than offsetting the 5.8% loss in October. Conversely, gold lost 5.4% over the month as risk appetite increased markedly. 

Fund strategy

Our neutral positioning heading into the elections served the funds well as market pricing of a Blue Wave outcome quickly unwound. While there is still some uncertainty surrounding the outcome of the Senate - to be determined by the Georgia runoffs of 5 January 2021 - we are of the view that this will be acquired by the Republican party which in all likelihood will prevent any meaningful tax hikes in the US. 

We remain constructive on emerging markets amid attractive valuations and potential high growth rates in corporate earnings and have moved to an overweight position. We maintain that the dollar will depreciate as risk appetite increases allowing for attractive entry point into emerging markets. Relatively robust high frequency data and contained Covid-19 cases in Asia also bolster our investment thesis at this point. These factors are also a fundamental underpin to our overweight positioning in emerging market hard currency debt. 

We are certainly cognisant on the rollout of a potential vaccine, but we believe this will take some time to be rolled out at scale. Nevertheless, this will be a positive boost to equity markets and an accelerated shift to “risk on” sentiment should also be beneficial to our current positioning. In developed markets, we believe that the unwinding of precautionary savings heading into 2021 with potential further monetary policy accommodation could well catalyse earnings projections. 

The funds are now modestly underweight duration to avoid the adverse effect from curve steepening amid better growth prospects currently being priced into markets. Nevertheless, we believe that there will unlikely be a material steepening in the bond yield curve as affordability concerns on both a sovereign and corporate level may well cause the US Federal Reserve to intervene and keep rates artificially contained.