Understanding the marketsUnderstanding the markets

Investment Comment January 2021

December saw a resurgence in coronavirus disruption worldwide, leading governments to impose travel restrictions and lockdowns. A new variant of the virus was detected in the UK, prompting European countries to restrict travel to and from the country. Meanwhile, the commencement of vaccination programmes across many developed nations boosted markets and brought a sense of optimism for the year ahead.

US equities were the global laggard in December, as the MSCI US index rose just 0.71% despite a stellar year in which the index gained 17.00%. This month, the deadlock in the US Government’s stimulus package talks was broken, as the House and Senate agreed on a $900bn relief programme that included $600 payments to every adult. Members of President Trump’s inner circle conceded defeat to Joseph Biden, including Senate leader Mitch McConnell. However, a final attempt to overturn the result lingered into the New Year, with little chance of success. Concessions came as successive lawsuits were rejected by courts across America, and President-elect Joe Biden pressed ahead with his cabinet picks. The former Federal Reserve Chair, Janet Yellen has been selected as Treasury Secretary. Her dovish tenure as leader of the Federal Reserve and her knowledge of monetary policy makes coordination between the Fed and the Treasury much more likely, ending an acrimonious period between the two institutions under Steven Mnuchin.

The MSCI Asia Pacific ex-Japan index performed strongly in December, rising 3.08% as countries in the region were perceived to be dealing well with Covid-19. Chinese regulators began antitrust investigations into Alibaba on Christmas Eve, mirroring US investigations into Facebook and Google.

The company was accused of monopolistic behaviour, as an owner of one of two ‘super apps’, by lowering the search rankings of companies who also list products on archrival Pinduoduo, which is backed by Tencent, or JD.com. Jack Ma, the founder of Alibaba and Ant Financial, previously angered the Communist Party by criticising financial regulation. The Renminbi rallied into the New Year, returning to levels of 6.5 to one US dollar last seen in 2018 before the trade war ignited. The rally was supported by the weakness in the US dollar and hopes that President-elect Joe Biden will adopt a less stringent trade policy.

European equities welcomed the signing of a trade deal with the United Kingdom in December, which had represented a material risk to the recent good performance of European markets this year. The MSCI Europe ex UK index rose 1.13% during the month. The EU also signed a historic trade deal with China. The deal enables EU member state companies to operate in China without having to partner with local firms and eliminates caps on investments. China’s rights in European markets were affirmed in the deal, although for Beijing the diplomatic coup was likely a motivating factor.  The pact may strain tensions with the US, as the Biden administration looks set to continue Trump’s policy of pressure on China to adopt what the US sees as more equitable trade standards with the rest of the world. Nevertheless, the two trade deals show that despite recent talk of economic nationalism and a global decline in free trade, multilateral agreements continue to be made.

The UK stock market suffered its worst year since 2008, as UK equities failed to rebound to the same degree as other markets. The MSCI UK index ended the year down 13.23% but was up 1.09% over December, as the Brexit trade deal was confirmed. Throughout the month both Sterling and the UK stock market suffered volatility, as hopes of a Brexit trade deal faded before Christmas. However, market angst subsided with Johnson’s announcement of a Brexit trade deal on Christmas Eve.  Crucially, the deal makes trade in goods between the UK and EU nations tariff and quota-free. The deal does however leave some key issues up for further negotiation. Covid-19 news still managed to contain UK market sentiment as a reportedly more infectious strain of the virus prompted the government to implement stricter social measures and led other European countries to restrict travel to and from the UK.

The MSCI Japan index rose 1.28% in December, rounding off a strong 2020. During the month, the government confirmed a further Covid-19 recovery package, this time for $294bn, bringing the total fiscal stimulus for the year to 17% of GDP. Despite having the largest debt burden in the developed world, the government approved a record $1trn budget for 2021. Yoshihide Suga, Japan’s new prime minister, faced growing public criticism over breaking the country’s lockdown rules. Suga, by law, needs to call an election before 2022, which is viewed as a key litmus test of whether voters will continue with Abenomics. However, Suga’s declining popularity may have an impact on the course of Japanese economic policy next year.  

Investors continued to rotate into emerging markets in December, following strong inflows in November, with the MSCI Emerging Markets index up 3.32%. One reason for this is that Emerging Market companies offered cheap valuations relative to developed market equities, and additionally tend to perform well coming out of recessions and bear markets. The risks remain that emerging markets may not have the health infrastructure to vaccinate their populations, as new virus strains were discovered to be spreading in South Africa and elsewhere. The virus may also have exacerbated the “middle-income” trap, in which countries have difficulty growing their GDP per person above around $10,000, converting to a service-based economy, and attracting foreign investment. While some emerging markets have provided explosive growth for investors, it is worth re-iterating that the category is immensely broad, and each market should be assessed independently.

December rounded off one of the strangest years in living memory. In markets, the year encompassed both extreme volatility and, at times, curious serenity in both equity and bond markets. The importance of central bank interventions has been underlined by their moves to mitigate short term lending issues, act as a buyer of bonds, and maintain interest rates at historic lows. For 2021, the unanswered questions are whether the virus can be brought under control and whether the world economy can return to anything resembling normality. At Cantab, our portfolios have been resilient, and by continuing with our strategy of diversified global investments across styles and asset classes, we look forward to the year ahead.

Risk Warnings This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice as at 1 January 2021, 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. It is important to note that in selecting ESG investments, a screening out process has taken place which eliminates many investments potentially providing good financial returns. By reducing the universe of possible investments, the investment performance of ESG portfolios might be less than that potentially produced by selecting from the larger unscreened universe.