After an eventful 2020, the New Year began with several major changes. Joseph Biden was inaugurated as the 46th President of the United States amid protests in Washington. Britain officially left the European Union transition period and trade began on the terms of the deal sealed in December 2020. Vaccinations continued to be administered across the world at varying rates, whilst many populations found themselves in renewed and stricter lockdowns.
US markets shrugged off the violence on Capitol Hill to make a strong start to the year. However the MSCI US equity index declined towards the end of the month recording a loss of 1.41%. Treasury yields remain well below January 2020 levels, with the 10-year Treasury yield hovering around 1% compared to 1.6% a year ago. The actions of the Federal Reserve over the course of 2020 have contributed to lower yields on both government and corporate bonds. With yields at sustained lows, investors debate whether this justifies an increase in equity valuations. Corners of the US market look increasingly detached from fundamentals. A surging initial public offering (IPO) market, where companies often debut at triple digit price to earnings, is one indicator. Huge speculative rises in heavily shorted companies are a new, retail-investor driven phenomenon driving a dislocation between price and fundamental metrics.
In contrast, investors point to the fact that large tech companies are the beneficiaries of a number of important secular trends, providing strong growth with attractive capital structures in the face of a global pandemic. Added to that, the US 10 year Treasury was yielding around 6% in the late 1990s and early 2000s, meaning the ‘risk free rate’ usually used in valuing companies was significantly higher. Jerome Powell, Chairman of the Federal Reserve, indicated on January 27 that monetary policy would remain supportive, and the Democrat’s clean sweep of both Houses and the Presidency should lead to more coherent and expansionary fiscal policy.
The MSCI Asia Pacific ex-Japan index rallied at the start of 2021, buoyed by many nations reporting stronger than expected trade figures and relative success at containing Covid-19. The index was the best performing in January, rising 3.56%. India may be approaching herd immunity to Covid, according to several recent studies. This would provide welcome relief for a country that has struggled to contain either the human or economic costs of Covid-19. Narendra Modi’s government increased fiscal stimulus in the first budget of 2021, hoping to spend out of an 8% GDP contraction in 2020.
China continued to recover strongly, despite the reoccurrence of coronavirus in several areas and renewed lockdowns to contain the spread. The Chinese government and Central Bank moved to stimie the country’s housing sector, as low borrowing costs and pent-up savings caused a boom in demand. Property lending as a percentage of bank lending has been capped to limit the systemic risk posed by the boom in residential credit.
European equity markets began the New Year poorly, with the MSCI Europe ex-UK index down 2.25%. Slower rollout of both the vaccine and the EU recovery fund hampered efforts by national governments to begin opening up their economies.
UK equities went in to 2021 buoyed by the Brexit deal and Britain’s relative success rolling out vaccines, despite a new lockdown as severe as the first, instituted in March 2020. However, the MSCI UK index lost steam towards the end of the month, ending down 0.69%. Sterling also rallied into the New Year on the same news. Both equities and the pound have languished versus developed market peers since the Brexit vote in 2016. Britain applied to join the Trans-Pacific Partnership, a group of developed and developing nations on the Pacific Rim. The agreement aims to reduce trade barriers and improve arbitration in trade disputes, as well as provide a counterweight to China in the region.
The MSCI Japan index declined 1.45%, as coronavirus cases in the country surged. While the Tokyo Olympics appeared in international headlines, a reorganization of the Tokyo Stock Exchange went under the radar. Japanese conglomerates often hold large crossover holdings in other listed companies, which critics argue is a recipe for conflicts of interest, insider dealing, and interdependency. To obtain premium listings, companies will now need to meet a minimum level of shares in the public market, or ‘free float.’ This move comes as part of a corporate governance overhaul initiated by Shinzo Abe, designed to stimulate growth in the country’s lacklustre economy.
Emerging Market equities continued to attract inflows in the first weeks of 2021, continuing their strong run from last year. The MSCI Emerging Markets index rose 2.56% in the month. Likewise Emerging Market credit markets experienced strong demand, as international investors brushed off the impact of coronavirus and sought attractive yields from developing nations. Many bonds are long-dated, with maturities as far off as 2071. In addition many are denominated in US dollars, such as a $3bn 10-year Indonesian sovereign bond issue yielding just 1.9%. Given that 10-year US Treasuries were yielding 2% just 18 months ago, this recent wave of debt issuance highlights the shifts in the global economy.
Although the New Year did not herald a change from the continued lockdowns experienced in 2020, for markets at least, two key touchpoints appear to have been completed without excessive disruption. The end of the Brexit transition and the beginning of Joe Biden’s Presidency remove uncertainties from trade, policymaking and international relations moving forward. However, volatility in markets can and will occur from the unlikeliest of sources. This was ably demonstrated by the turmoil in the US hedge fund industry caused by a retail investor forum, leading to seemingly spectacular gains unravelling overnight. By remaining focused on our client’s objectives and attitudes to risk, Cantab takes the long term view by investing with experienced managers across a range of asset classes and geographies.
This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice as at the date above, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future.