Source: Money Marketing
In a year of bad news and extreme volatility, 2020 looks like it might end on something of a relative high.
News of successful vaccine trials at Pfizer/BioNTech, Moderna and AstraZeneca/Oxford university in the fight against Covid-19 has seen some lagging markets soar and unfavoured asset classes regain investor attention.
Since the news of a potential vaccine broke, the markets have seen a few noticeable trends. Throughout 2020 for instance, the UK has lagged other equity markets, in large part because of political problems such as on-going Brexit uncertainty and a perception that the government has not handled the Coronavirus fallout particularly well. In some quarters, the UK has even been said to have been behaving like an emerging market with all the volatility that that entails, rather than a more established one.
Nonetheless, in November, the UK saw the first signs of a reversal in this trend, where it has become one of the best performing regions among the larger global economies. Part of the reason for the UK’s outperformance is the role played by two cyclical sectors which are heavily weighted in the FTSE indices – financial services and energy.
The news of vaccine development has had the immediate effect of seeing the oil price rise sharply on expectation that demand will come back quickly in 2021, as people start travelling again and economies get back to full production.
There is also a general market assumption that inflation will become a factor at some point in the near future and as inflation begins to push up towards target, central banks will begin to raise interest rates. This outlook is good for banks as they become more profitable when interest rates are increasing – a fast recovery also boosts banks as they are likely to face lower levels of bad loans.
At fund level, the impact of these reversing trends has seen value stocks reverse some of their long-term underperformance. As we can see from the chart below, Schroder’s Income fund, which is a UK-focused value fund, and growth fund Royal London Sustainable Leaders (which has been awarded the highest 5-Crown rating by FE Investments) have produced positive returns throughout November. But the Schroder fund has seen particularly strong returns, outperforming the growth fund by around 20%. The fund has a concentrated approach and its 37 holdings include positions in NatWest, Barclays, Lloyds and Aviva, as well as Royal Dutch Shell and BP.
Conversely, other trends that investors will have become familiar with over the past 11 or so months are now seemingly in reverse. As Covid-19 spread across the world in February and March and economies ground to a halt throughout April and May, the price of gold (whose main use is a hedge against inflation or an equity market correction) soared as investors poured their money into traditional safe havens. If we are to take another look at the funds listed above over a longer timeframe and add in BlackRock’s popular Gold & General fund (which invests in companies deriving a significant proportion of their income from gold mining or commodities such as precious metals), we can see from the following chart that after the initial sell-off in mid-March it recovered quickly and was back to generating positive returns in a matter of weeks.
Now, if we concentrate on the relative performance of these funds from November onwards, we see that excluding an initial spike at the beginning of the month, the BlackRock fund has seen a very sharp correction as the price of gold has dropped.
Nobody expects the remaining weeks of 2020, or indeed the early months of 2021 to be plain sailing. Politicians of all persuasions and nationalities have been quick to play down talk of the vaccines as being a ‘miracle cure’.
However, and perhaps for the first time this year, there appears to be a sense of optimism at the prospect of a returning normality. Already the markets are realigning themselves in anticipation of who the economic winners and losers will be when things tentatively return to normal. By the end of December at least, we should be able to see whether November’s gains for the traditional stocks are a temporary tailwind, or something more longer term.