A selection of articles looking back through the markets last month.
Global Market Review
A November to remember
It was a November for investors to remember as a widespread focus on the perceived safe havens of gold and government bonds was replaced by renewed interest in equities. Many major equity markets notched up double-digit gains over the month, buoyed by significant breakthroughs in the development of coronavirus vaccines. Positive results from a vaccine developed by Pfizer and BioNTech were followed by Moderna’s vaccine, and then by a vaccine developed by the University of Oxford and AstraZeneca.
“UK economic output is not expected to return to pre-pandemic levels until the end of 2022”
Investors were heartened by Joe Biden’s eventual victory in a bad-tempered and tumultuous US Presidential election. Uncertainty surrounding the transition from a Trump to a Biden presidency dissipated as the month went on; whilst repeating his allegations of fraud, President Trump confirmed that he would co-operate with the incoming administration. Sentiment was further buoyed by the news that President-elect Biden had nominated former Federal Reserve (Fed) Chair Janet Yellen as his Treasury Secretary. The Dow Jones Industrial Average Index breached 30,000 points for the first time ever during November and rose by 11.8% over the month.
As the national lockdown drew to an end in England, the UK Government announced that the country would move to a regional “tiered” system, raising concerns over the impact on the hospitality and leisure industries. Nevertheless, news of significant progress in the development of a Covid-19 vaccine provided a welcome boost for sentiment, and the FTSE 100 Index rose by 12.4% over the month. Elsewhere, the Chancellor of the Exchequer warned that UK economic output is not expected to return to pre-pandemic levels until the end of 2022.
President of the European Central Bank (ECB) President Christine Lagarde warned that the pandemic has created “a highly unusual recession and is likely to give rise to a similarly unsteady recovery”. Although she welcomed the “encouraging” news about vaccines, she believes the recovery was likely to be “rather unsteady, stop-start and contingent on the pace of vaccine roll-out”. Nevertheless, over November as a whole, the Dax Index rose by 14.9%, while the CAC 40 Index soared by 20.1%.
During the month, the leaders of 15 Asian nations – including Japan, China, South Korea, Australia, New Zealand, and the ten ASEAN countries – signed the Regional Comprehensive Economic Partnership (RCEP), a trade deal that will encompass almost one-third of the world’s population and about 30% global GDP.
Asia & Japan Market Review
Asian markets surge in November
Equity markets in Asia performed strongly during November, driven by hopes that Covid-19 vaccines will soon be widely available. Investors were also buoyed by the news that Joe Biden had won the US Presidential election.
“The Nikkei 225 Index reached its highest level in nearly 30 years”
Over November, the Nikkei 225 Index reached its highest level in nearly 30 years and rose by 15% over the month. Meanwhile, the Topix Index climbed by 11.1%, and the TSE Second Section Index – which focuses on medium-sized Japanese companies that have less exposure to export activity – increased by a more muted 6.8%.
Having shrunk by 8.2% in the second quarter and by 0.6% in the first quarter, Japan’s economy emerged from recession in the third quarter to expand by 5%. Growth was boosted by an increase in domestic demand alongside improving export activity. During October, the slowdown in Japanese exports continued to ease: shipments fell at an annualised rate of only 0.2% during the month, compared with September’s decline of 4.9%. The slowdown in imports also moderated: imports fell at an annualised rate of 13.3% in October, having dropped by 17.4% in September.
The Reserve Bank of Australia (RBA) cut its key interest rate to 0.1% and announced that it would purchase $100 billion-worth of medium-dated government bonds to reduce borrowing costs. Although Australian interest rates now stand close to zero, RBA Governor Philip Lowe maintained that negative rates are “extraordinarily unlikely”, commenting: “monetary policy is now about more than just short-term interest rates … if we need to do more, we can and we will”. The RBA raised its forecast for economic growth in the year to June 2021 from 4% to 6% but warned that high unemployment poses the principal risk to the economy. The country’s rate of unemployment stood at 7% in October.
Later in the month, the RBA’s Deputy Governor Guy Debelle urged Australia’s government to avoid removing stimulus measures too quickly, warning: “A number of European countries learned this lesson to their cost after the global financial crisis”. The ASX All Ordinaries Index rose by 9.9% over November.
During November, the leaders of 15 Asian nations – including Japan, China, South Korea, Australia, New Zealand, and the ten ASEAN countries – signed the Regional Comprehensive Economic Partnership (RCEP), a trade deal that will account for around 30% of the world population and about 30% of global GDP.
Emerging Markets Review
Investors welcome a Biden presidency
Share prices in China rose following the news of Joe Biden’s victory in the US Presidential election. Although President-elect Biden is expected to take a relatively robust approach when negotiating with China, his administration is likely to be less combative than that of his predecessor. The Shanghai Composite Index rose by 5.2% during November.
“China is the only major emerging economy predicted to achieve positive growth in 2020”
The People’s Bank of China (PBoC) injected more liquidity into China’s financial system in a move designed to support the country’s economic recovery. China is the only major emerging economy predicted to achieve positive growth in 2020; the International Monetary Fund (IMF) expects China to expand by 1.9% this year and by 8.2% next year. In the longer term, growth in emerging economies is expected to decline to 4.7% by 2025 – well below the 5.6% average achieved between 2000 and 2019. This moderation is likely to be led by a structural slowdown in China following a strong cyclical rebound in 2021.
A survey undertaken by Brazil’s central bank suggested that inflationary pressures are expected to build, fuelling speculation that policymakers will move to tighten monetary policy over the next year. The central bank has an inflation target of 3.75% in 2021 and 3.5% in 2022. During October, Brazil’s rate of consumer price inflation rose at a monthly rate of 0.86%, hitting its highest October growth rate since 2002. Meanwhile, wholesale prices rose by 3.4% month on month during October, posting their strongest monthly increase since January 2014. On an annualised basis, they climbed by 19.1%. The Bovespa Index rose by 16.1% over November.
During November, credit ratings agency Fitch affirmed Brazil’s credit rating at “BB-“ with a “negative” outlook. Whilst acknowledging the country’s large and diverse economy, capacity to absorb external shocks, deep government debt market, and relatively high per-capita income, Fitch also cited Brazil’s “high and rising” government debt, its “rigid” fiscal structure and its lacklustre potential for economic growth, compounded by a “challenging” political backdrop that is likely to hinder reform.
Having contracted at an annualised rate of 23.9% between April and June, India’s economy recovered to shrink by a more moderate 7.5% during the three months to September. The IMF expects India’s economy to contract by 10.3% this year and then to expand by 8.8% next year. During November, the CNX Nifty Index rose by 11.4%.
Europe Market Review
European markets shrug off negative data
Although November in Europe was characterised by rising Covid-19 infection rates and lacklustre economic data, share prices soared over the month, driven up by global optimism over the prospect of an effective vaccine. Over November, the Dax Index rose by 14.9%, while the CAC 40 Index increased by 20.1%.
“The Covid-19 pandemic has created ‘a highly unusual recession’”
The Covid-19 pandemic has created “a highly unusual recession” that is likely to result in a “similarly unsteady recovery”, according to President of the European Central Bank (ECB) President Christine Lagarde. While welcoming the “encouraging” news about vaccines, she warned that the recovery was likely to be “rather unsteady, stop-start and contingent on the pace of vaccine roll-out”. Looking ahead, she believes that the key challenge for policymakers will be to bridge the gap until the programme of vaccination has progressed and the economic recovery can build its own momentum.
Against a backdrop of weakening economic sentiment and negative inflation, the ECB will continue to expand its stimulus measures. President Lagarde warned that inflation in the euro area is likely to remain mired in negative territory for longer than previously anticipated. The eurozone’s rate of consumer price inflation remained unchanged at -0.3% in October.
As infection rates intensified, economic sentiment in the eurozone fell for the first time since the first wave of coronavirus. According to the European Commission, confidence deteriorated particularly sharply in consumer- and service-related sectors. The decline in sentiment was particularly pronounced in Italy and France, whereas Germany’s dip was more muted. In contrast, the Netherlands posted a slight improvement in confidence.
Having shrunk by 9.8% in the second quarter and 1.9% in the first quarter, Germany’s economy expanded by 8.5% during the third quarter and exited recession, boosted by household consumption and strengthening export activity. The country’s statistical office suggested that this growth could help to “offset a large part of the massive decline in the gross domestic product recorded in the second quarter of 2020 caused by the coronavirus pandemic”.
However, business confidence in Germany continued to weaken, according to the Ifo Institute, which attributed the deterioration to the second wave of coronavirus infections that led to fresh lockdown measures and “interrupted Germany’s economic recovery”. Although the business climate improved in the manufacturing sector, sentiment in the services sector returned to negative territory, and the indicators for hotels and hospitals “absolutely nosedived”.
Global Bond Market Review
Corporate defaults on the rise
Investors’ attention shifted from safe havens to riskier assets during November, buoyed by mounting optimism over Covid-19 vaccine development and by Joe Biden’s victory in the US Presidential election. Share prices rose and bond prices fell; while the ten-year US Treasury bond yield eased from 0.88% to 0.84% over November as a whole, it rose as high as 0.98% during the month. Nevertheless, there are still question-marks in the US over which party will have control of the Senate, which will not be decided until the state of Georgia holds runoff elections in January. Credit ratings agency Fitch believes that a divided Congress is likely to hamper the ability of President-elect Biden’s administration to pass legislation addressing key structural fiscal and economic issues.
“The ECB is set to continue its programme of stimulus measures”
The International Monetary Fund (IMF) warned that increasing infection rates continue to hinder global economic recovery and called on countries not to withdraw support too quickly. IMF Managing Director Kristalina Georgieva emphasised the need for “continued strong policy action” and urged leaders to cooperate with each other to achieve more efficient outcomes.
During November, European Central Bank (EBC) President Christine Lagarde warned that inflation in the eurozone is likely to remain negative for longer than expected. The ECB is set to continue its programme of stimulus measures. The yield on the ten-year German government bond strengthened from -0.62% to -0.57% during November, but climbed as high to -0.47% over the month.
Global corporate defaults reached 200 by the start of November, according to S&P Global Ratings. This was the first time since 2009 – during the Global Financial Crisis – that the number of defaults has reached 200. Defaults have increased in the US and Europe: these regions not only have largest number of rated issuers but are also particularly exposed to sectors that have proved vulnerable to the impact of Covid-19, such as energy, consumer and retail, media and entertainment, and hotels. All these sectors had relatively weak credit before the pandemic.
Demand for globally diversified funds was strong during October, according to the Investment Association (IA), and Global Bonds was the second-best-selling IA sector during the month, surpassed only by the Global sector. UK Gilts and £ Corporate Bond were also in the top ten best-selling fund sectors in October; in contrast, the £ Strategic Bond and £ High Yield sectors experienced substantial outflows.
UK Bond Market Review
Improving optimism… deteriorating data
Investor sentiment improved sharply during November, underpinned by the news of vaccine breakthroughs in the UK and the US. Improving hopes for the economic outlook led to a surge in demand for higher-risk assets and a consequent decline in appetite for perceived safe havens. The yield on the benchmark UK gilt rose from 0.26% to 0.35% over November as a whole, but climbed as high as 0.44% during the month.
“The OBR warned that a no-deal Brexit would cut economic growth in 2021 by a further 2%”
The UK economy emerged from recession in the third quarter, posting record growth of 15.5%, having contracted by 19.8% and 2.5% respectively in the second and first quarters. Growth during the three months to September was boosted by consumer spending and by the return of students to school and university.
In September itself, the economy grew by 1.1%; however, although this represented a fifth straight month of positive growth, the ONS reported a “loss of momentum” across all sectors between June and September. The economy remained 8.2% smaller than it was before the pandemic at the end of 2019. The rate of unemployment rose from 4.5% to 4.8% during the three months to September, while redundancies increased to a record high of 314,000. The number of people unemployed climbed by 243,000 to 1.62 million during the period.
In the Government’s Spending Review, the Chancellor of the Exchequer warned that UK economic output is not expected to return to pre-pandemic levels until the end of 2022. The UK economy is set to shrink by 11.3% this year – its worst contraction for over 300 years – and unemployment is tipped to climb as high as 7.5% next year.
Government borrowing rose to £214.9 billion during October, and the Office for Budget responsibility (OBR) expects it to reach its highest-ever peacetime level of £394 billion in 2020. Meanwhile, public sector net debt climbed to £2.08 trillion in October, representing 100.8% of GDP – a level last reached in the early 1960s.
In addition to the economic pain caused by Covid-19, the OBR warned that a no-deal Brexit would cut economic growth in 2021 by a further 2%. “Trade-intensive” sectors such as manufacturing, financial services, mining and quarrying – which have held up relatively well under the impact of the coronavirus pandemic – are judged to be particularly vulnerable to the “loss of unfettered access to the EU market”.
UK Equity Market Review
UK equities rally in November
UK share prices rose strongly during November, driven up by mounting optimism over the development of Covid-19 vaccines and hopes that a Brexit trade deal will be reached before the transition period ends on 31 December. Governor of the Bank of England (BoE) Andrew Bailey hailed the news of vaccine breakthroughs as “a big step forward … (that) will play a major role in lowering the level of uncertainty”. The FTSE 100 Index rose by 12.4% during November but fell by 16.9% since the start of the year; meanwhile, the FTSE 250 Index climbed by 12.3% over the month but declined by 11.6% over the year to date.
“Consumer confidence fell during November to its lowest level since the first wave”
Ahead of the end of England’s national lockdown on 2 December, the Government revealed a new system of regional tiers, which triggered fresh concerns over the outlook for the beleaguered leisure and hospitality sectors. Retail sales rose for a sixth consecutive month during October, rising by 1.2%. The Office for National Statistics (ONS) reported strong online activity as consumers started their Christmas shopping early; however, sales at clothing stores remained below their pre-Covid levels.
The UK economy achieved record growth and came out of recession during the third quarter, expanding at a rate of 15.5%. Looking ahead, however, economic growth is not expected to hold up against the effects of the second lockdown and the subsequent “tiered” restrictions; in his Spending Review, the Chancellor of the Exchequer warned that output is unlikely to recover to pre-pandemic levels until the end of 2022. According to GfK, the second lockdown “couldn’t have come at a worse time for the UK’s high street retailers”, and consumer confidence fell during November to its lowest level since the first wave of coronavirus.
The number of profit warnings issued by quoted UK companies over the first nine months of 2020 reached a new annual high of 524, compared with the previous annual record of 506 in 2001. According to EY, more than one-third of UK listed companies have issued a profit warning over the last 12 months as firms struggled to deal with the impact of the Covid-19 pandemic and ongoing uncertainty over Brexit. Nevertheless, profit warnings actually fell by 25% year on year during the third quarter, which tends to be the quietest period for corporate reporting.
UK Equity Income Market Review
A tough Q3 for UK dividends
UK share prices surged and yields fell during November as investors became increasingly optimistic over prospects for economic recovery. Confidence was underpinned by strong results from Covid-19 vaccine developments, and by hopes that the UK Government will be able to reach a Brexit trade deal before the end of the year.
“UK dividends fell to their lowest third-quarter total for a decade”
During November, the FTSE 100 Index rose by 12.4%, while the FTSE 250 Index climbed by 12.3%. Over the year to date, the best-performing FTSE sectors included leisure goods, technology hardware & equipment, and equity investment instruments, whereas the worst-performing sectors included oil & gas, fixed-line telecommunications, and banks.
The yield on the FTSE 100 Index fell from 4.73% to 3.88% over November, while the FTSE 250 Index’s yield declined from 3.55% to 2.86% over the month. In comparison, the yield on the benchmark UK gilt rose from 0.26% to 0.35% during November.
Introducing a “new sustainable and resilient dividend policy”, insurer Aviva cut its total dividend by almost one-third and confirmed that future payouts will grow by “low to mid-single digits over time”. Elsewhere in the sector, RSA received a joint takeover bid from Canada’s Intact and Denmark’s Tryg worth £7.2 billion, and the bidders recommended that RSA should pay its previously announced interim dividend of 8p per share alongside their cash offer of 685p per share. Meanwhile, supermarket operator Sainsbury’s announced a half-year loss but opted to pay a special dividend of 7.3p per share alongside its interim dividend. Retailer Pets At Home revealed a 14.6% in half-year pre-tax profits and maintained its interim dividend payout and, despite revealing a 50% drop in full-year profits, the Daily Mail & General Trust increased its final dividend payout.
Dividends in the UK have fallen further than most other countries, according to Janus Henderson’s Global Dividend Index, which reported a headline decline of 47% and an underlying decline of 41.6%, compared with a global headline drop of 14.3% and an underlying fall of 11.4%. UK dividends fell to their lowest third-quarter total for a decade, hampered by an “unfavourable” sector mix dominated by oil, banks, and mining, a history of overdistribution, and a concentration amongst a few major payers. On a brighter note, some firms have resumed dividend payments or announced that they intend to restart during the fourth quarter.
US Market Review
US share prices reach new highs
Share prices surged in the US during November, driven up by significant progress in Covid-19 vaccine developments. Investors drew encouragement from positive reports about the two vaccines developed by US companies Pfizer and Moderna amid hopes that an effective vaccine would eventually bring an end to shutdowns and social distancing and allow the economy to recover.
“November was dominated by political developments”
Aside from the prospect of a vaccine on the horizon, November was dominated by political developments as the US Presidential elections took place. After several days of wrangling and recounts, Joe Biden emerged as the victor, and will become the 46th US President on 20 January 2021. His victory was soured, however, by President Trump’s continued allegations of electoral fraud; while he eventually agreed that he would co-operate with the incoming Biden administration, he reiterated his accusations of fraud. The Electoral College will certify its votes on 14 December. Meanwhile, although the Democratic Party managed to hold on to the House of Representatives, it remains unclear which party will control the Senate until runoff elections take place in Georgia in January.
Investors also welcomed the news that President-elect Biden had nominated former Federal Reserve (Fed) Chair Janet Yellen as his Treasury Secretary. If her nomination is confirmed, she will be the first woman to lead the US Treasury Department in its 231-year history.
Treasury Secretary Steven Mnuchin refused to approve an extension of the majority of the Fed’s credit programmes and asked the Fed to return any unused funds granted under the CARES Act passed for Covid-19 relief. The Fed said it was disappointed by the ruling.
The Dow Jones Industrial Average Index climbed by 11.8% over November and rose above 30,000 points for the first time during the month. The S&P 500 Index rose by 10.8% and the Nasdaq Index increased by 11.8%. The best-performing S&P industry sectors were energy – which rose by over 26% on the month – financials, industrials, materials, and information technology, which all posted double-digit gains.
The US economy added 638,000 new jobs during October; The rate of unemployment dropped from 7.9% to 6.9%, and the number of unemployed people fell by 1.5 million to 11.1 million. Nevertheless, although the Bureau of Labor Statistics (BLS) has now reported a decline of both measures for six consecutive months, it is worth noting that they are almost twice their February levels.