Inflationary fears form the backdrop to good indicators for several markets and sectors, but there are robust defensive moves investors can be taking to mitigate the risks.
Hopes for an effective Covid vaccine and the resumption of “normal service” in White House have offered investors much-needed respite from this year’s barrage of bad news. Here, experts from our panel of wealth managers examine the portfolio implications of these glad tidings.
Vaccine news is seen as a booster for European and UK cyclical stocks
Belief in US growth reinforced by factors likely to keep interest rates low
Reasons to hope for healthy US-China relations that will bode well for global equities
Pfizer’s announcement that it is has developed a vaccine ready for regulatory approval has been welcome news for the markets. Equities and other risk markets have moved sharply. The 90% infection prevention rate has boosted investor sentiment, which was also buoyed by the US Election result.
The pandemic has been dealt with through a series of instruments, which are progressively becoming less blunt. First came the lockdowns. Then central banks, following the Federal Reserve’s lead, opened monetary policy taps to pump money into struggling economies. Next came furloughing, payroll protection and direct payments to households. But the vaccine is the most crucial. Until the virus is under control, economies cannot get back to normal.
This might be a false dawn. The logistical process of manufacturing and distributing billions of vaccines cannot be underestimated. The virus will be with us for a long time, but its impact on economic activity could be dampened, which is why markets are soaring.
We also like European equities and the latest vaccine news supports this – the early indicators are that it will benefit cyclical stocks, such as industrials and travel. UK equities will gain from the same dynamic
So, how will the vaccine impact investors?
We have been recommending being constructive on equities and risk for a few months, seeking ideas to navigate the uncertainty. We like technology and healthcare themes that have shown their resilience during the pandemic. We have implemented ESG (environmental, social and governance) themes into the wider portfolio, related to clean energy and cyber security – and the environmental message provided by US President-Elect Biden should be reflected in climate change investments.
We also like European equities and the latest vaccine news supports this – the early indicators are that it will benefit cyclical stocks, such as industrials and travel. UK equities will gain from the same dynamic.
There is still a way to go, but this week the message is clearer: we are seeing the light at the end of the virus tunnel and this is positive for investors.
Chief Investment Officer at Canaccord Genuity Wealth Management
The polls had long been indicating a landslide victory for Biden in the recent US elections, but the highly anticipated “Blue Wave”, with the Democrats taking both the Presidency and the Senate, did not materialise.
Undaunted however, the markets welcomed this news believing that a somewhat constrained Biden presidency, rather than a one-sided government, is likely to lead to a better outcome for investors during his tenure at the White House.
Biden will take office whilst inflation and interest rates are low, unemployment is high, but equity valuations along with public and private sector debt are at record high levels. However, further fiscal stimulus and an accommodative Fed should mean interest rates will remain low, thus enhancing future growth prospects.
Biden will take office whilst inflation and interest rates are low, unemployment is high, but equity valuations along with public and private sector debt are at record high levels. However, further fiscal stimulus and an accommodative Fed should mean interest rates will remain low, thus enhancing future growth prospects
Biden also inherits a divided country, but recent political rhetoric and positive Covid vaccine developments may bring about both a healing and a step-change in how the US deals with the pandemic, which is still accelerating across the nation.
Covid statistics are susceptible to misinterpretation, with reduced testing being one of the main issues to consider when evaluating apparent improvements in the rate of infection. As this “second wave” progresses, parts of the UK have “locked down” for the second time this year in order to halt the spread of the virus, but elsewhere in many parts Europe it is encouraging to note cases appear to be falling or at least moderating.
Brexit negotiations continue as the deadline for the UK to leave the EU ticks ever closer, but as the eleventh hour approaches, investor focus may gradually turn to evaluating how the advent of one or more effective Covid vaccines might help shape next year’s global economic recovery.
Director, Investment Management, at Arbuthnot Latham & Co., Limited
While most of us take Trump’s rhetoric with a pinch of salt, believing that Beijing would “own America” under Biden would be an error. If we rewind the clock to 2015, Biden’s stance on the world’s second largest economy had already hardened. Biden is on record calling President Xi a “thug” and was not shy to label China’s treatment of Muslims in Xinjiang province as “genocide”. This is language you would associate with Trump rather than the elder statesman with almost 50 years in office.
Instead, Biden will focus on realigning US interests with its long-time allies and presenting a united front to a nation that is “strategic competition”. And while we will not see threats (or tweets), we will see Biden protecting US interests, enforcing existing trade laws and confronting human rights abuses. At the same time, he is likely to extend an olive branch to China to tackle climate change, nuclear proliferation and the global pandemic.
As former chair of the Senate Foreign Relations Committee, Biden knows the US-China relationship was the most important commercial interaction in history. The US played a key part in helping engineer China’s growth, which has been vital for the world economy.
Biden will want to encourage US companies that did business in China to dip their toes back into a market boasting the world’s largest population. Similarly, Chinese companies with operations in the US might also be lured back to doing brisk business
Recently, however, the China-US trade flow has dropped dramatically. In the first quarter of 2020, it fell to just US$200 million. This is about one tenth of the trade that we saw in every quarter in 2019 – a year that itself was the lowest year for investment into the US since 2009. As such, Biden will want to encourage US companies that did business in China to dip their toes back into a market boasting the world’s largest population. Similarly, Chinese companies with operations in the US might also be lured back to doing brisk business.
There is a strong public feeling in the US that it shouldn’t have its eggs in the China basket, but a divisive divorce between these two nations does not benefit either of them financially – or other investors. A healthy relationship between the US and China would be positive for global equities, given China accounts for a third of the world’s gross domestic product.
Investment Counsellor at Nedbank Private Wealth
The investment strategy explanations contained in this piece are for informational purposes only, represent the views of individual institutions, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
We always advise consultation with a professional before making any investment decisions.
Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.