Equity strategy and market outlook – November 2020

In this month’s strategy piece, Alastair expects that 2021 will be a year of recovery and repair with a substantial rebound in global GDP. With a vaccine, investors now have rational expectations, rather than hope, that the worst impacts of the pandemic will soon be over. Political populism appears to have peaked with the unseating of US President Trump in favour of a more conventional president-elect Biden. Brexit negotiations seem to be converging on a minimal deal. This should enable the flow of goods over the UK/EU border with relatively modest disruption. It will not be what had been hoped for by idealistic Brexiteers, but would eliminate uncertainty, benefiting UK equities. Despite the vaccine news, we expect a sustained period of low interest rates and balance sheet expansion by the world’s central banks. Talk of monetary policy renormalisation is likely to be a H221 story at the earliest. In view of the economic recovery, dramatically increased issuance and a decline in demand for safe-haven assets, we expect bond yields to rise during 2021. We also note that the US Fed has shifted to an average inflation-targeting regime and the ECB may soon follow; if credibly implemented this would also imply higher nominal yields for long-term bonds. Investors have been swift to mark-up equity benchmark indices as successful vaccine trials have been announced, political risks have diminished and valuations for many popular sectors remain higher than long-term averages. While looking forward with a positive outlook, we recognise this is a consensus view and we expect equity gains over the year to be relatively measured.

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