Cambridge Weekly 16th November 2020

Change is in the air.   

Investors have enjoyed another very good week. Optimism had already returned the previous week, with the US election eventually delivering a clear verdict. Last week then brought the news that literally everybody had been waiting and hoping for, and which we had portrayed as probable in our ‘optimistic case’ forward-look on these pages two weeks ago. The news last Monday that the BioNTech/Pfizer vaccine candidate had not only generated immunity against the virus, but also at an astounding efficacy of over 90% had stock markets switch from optimism to practical euphoria.

Stock markets around the western world jolted upwards by 5-8% on the day, which saw them not only erasing the declines of late October, but in most cases also returning to previous highs from the summer. Compared to the pattern of the recovery rally from late March, the market action last week was distinctly different. Those sectors and companies that had been hardest hit over 2020 by the risk that vaccines may never offer a remedy to the COVID-19 virus (‘lockdown losers’) rallied most. On the other hand, the ‘virus victors’ of the lockdown economy – especially the US tech giants – lost ground on the news. This also found its reflection in regional return differences with Europe and especially the UK for the first time in a long while leading the weekly investment return tables by a considerable margin.

A mini boom for the housing market?

With the US Presidential election now decided (barring unlikely success in the courts), and a coronavirus vaccine by the year-end now looking a near certainty, markets are feeling positive about the prospects for 2021. But as noted before, much of the growth story for next year hinges on additional demand generated by a step up of investment activity across the global economy.

The backdrop for this is looking good. Central banks have committed to ‘looser for longer’ interest rates and yield levels, through continued asset purchases (our old friend quantitative easing), flooding the financial system with liquidity, while making the cost of investing cheaper than ever. This is allowing governments in the developed world to expand their fiscal support to ensure economies can bridge the gap between now and normality. This should protect the integrity of most businesses’ productive capacity by avoiding ‘economic scarring’ from this year’s activity constraints. Importantly, it should also facilitate scaling up of fiscal stimulus investment programmes to boost growth once the pandemic is behind us.

China remains an exercise in risk management

Last week, Beijing forced out several pro-democracy lawmakers in Hong Kong, declaring them a threat to national security and putting another nail in the coffin of the ‘one nation, two systems’ principle. The move gave the Chinese authorities the power to dismiss politicians without having to go through the courts.

On Thursday, President Trump issued an executive order which will force US-regulated pension funds to divest from firms which are embedded in China’s military machine. He will do more in his remaining days in office – making other sanctions or tariffs more likely. And, while the Communist Party will hardly miss Trump, there is no guarantee that President-elect Biden will be any softer on the People’s Republic.

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