Market Insights - December 2020

Published on December, 18th 2020 Market and research
Winter in... Coming?
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Frank TRIVIDIC

Deputy Chief Investment Officer

Written by Frank Trividic, Deputy Chief Investment Officer at Seeyond, on December, 14th 2020

   

  • Equity markets: consensus is positive and so are we
  • Government bonds lose traction due to a decrease in risk aversion
  • Cyclicals should catch up but volatility should remain high

   

   

As expected, the equity markets rebounded strongly in November. A clear result for the US elections and very positive announcements about COVID vaccines lead way to favorable prospects for 2021. Our analysis of the fundamentals of equity and fixed income markets is clear: Risk On! Cyclical and value stock markets should catch up faster. Long term yields should gradually tighten and the dollar accentuate its decline.

     

Equity markets in "Bull" mode

Starting this summer, fundamentals continue to improve for equity markets. All main markets benefit from a favorable economic environment (see Chart 1). The improvement is particularly true for markets outside the US.

    

Chart 1: Evolution of equity market fundamentals over 3 months

chart1

Source: SEEYOND / proprietary models, as of December 3rd, 2020

     

Improving earnings expectations are the main drivers of improvement across all geographic areas. The weakness in macro data is relative and should be temporary. Valuations are not a matter of concern yet.

From a technical perspective, stock markets are in a safe regime. Only the UK Footsie 100 remains neutral while other European markets have turned positive in late November or early December. On the short term, market dynamics may appear overly optimistic. Nevertheless, we believe this is coherent with the unprecedent shock during last spring. History shows that similar euphoria can last for several months after huge market downturns.

     

Chart 2: Equity market trend analysis (1996 - 2020)

chart2

Source: SEEYOND / proprietary models, as of December 3rd, 2020 – Average equity market momentum indicator (S&P500, Nasdaq, EuroStoxx50, Footsie100, SMI, Nikkei225, Asx200, MSCI EM)

      

Core government bonds are losing traction 

“Risk On” mode is also found on the fundamentals of the main core sovereign bond markets. All our fundamental indicators are negative with the sharpest move on UK Gilts. The hopes of a swift crisis resolution more than offsets Brexit-related risks (see Chart 3).

       

Chart 3: Evolution of core sovereign bond fundamentals over 3 months

chart3

Source: SEEYOND / proprietary models, as of December 3rd, 2020

      

The significant decline in risk aversion and the continued positive dynamics of the economic recovery weigh on our Treasuries models. Valuations of main government bond markets do not seem high. Govies have the potential to appreciate in the event of a relative slowdown in economic recovery and a consolidation in Equity markets.

       

What Next?

We are still waiting for the announcement of a new relief plan for the US economy. Talks are progressing and we believe that this will help to bridge the gap to a new stage in economic recovery from spring 2021. In Eurozone, a deal was finally reached to validate the EUR 750 billion stimulus package. The ECB also strengthened its Pandemic Emergency Purchase Program which would provide a strong support to the European economy.

The rapid start of vaccination campaigns among people most at risk and exposed to COVID will limit the restrictive measures and their impact on economic activity.

The most cyclical markets and those most affected by the crisis in 2020 should outperform the so far most resilient markets or sectors. We believe government bond yields will adjust upwards, but under control of Central Banks who want to avoid any derailment. The volatility of the equity markets should remain high, with large up and down movements.

      

     

This article has been provided for information purposes only to professional clients as defined in the MiFID Directive. It must not be used for retail investors. The provision of this material or reference to specific sectors or markets in his article does not constitute investment advice or a recommendation or an offer to buy or sell any security. Investors should consider the investment objectives, risks, and expenses of any investment carefully before investing. Views expressed in this article as of the date indicated are subject to change and there can be no assurance that developments will transpire as may be forecasted in this article.