- We upgraded our equity outlook as key elements of uncertainty have moved to the rearview mirror while the vaccine is no longer just a hope. The winter will likely be dark and cold, but with the vaccine rollout under way, fiscal and monetary stimulus will help bridge the way to a more normal life in 2021.
- Vaccine developments have opened the door to market rotation toward cyclicals and value. Energy and financials have outperformed, and while these are attractive tactical plays, they will continue to face long-term headwinds after the COVID-19 storm passes. 2021 Earnings per share (EPS) growth projections for cyclicals have not revised meaningfully higher, whereas expectations for COVID-19 winners info tech, healthcare and communications remain at the top of the pack.
- We think investors should remained focused on overweighting global equities to benefit from the reflation trade, rather than seek to pick outperforming sectors or factors as the longer-term theme of tech earnings leadership is not expected to go away.
- Regionally, we continue to prefer U.S. and Emerging Markets (EM) equities over Canadian and Europe, Australasia, and the Middle East (EAFE) markets as we continue to expect earnings outperformance, while Investment Grade (IG) corporate bonds look more attractive than riskier High Yield (HY).
Global Stocks: COVID-19 losers lifted by vaccine
Equity Factors: Vaccine shot helping some, but not all
With investors starting to see the light at the end of the COVID-19 tunnel, Value (+14.7%) stocks outperformed global stocks (MSCI ACWI, +12.4%),while Low-Volatility (+7.0%), which have also disappointed year-to-date, continued to lag as Low-Volatility companies typically exhibit a lower dependency to the global economic and profit cycle. Small-Cap (+14.3%) was the only other factor outperforming global stocks in November.
Vaccine Tide More Likely to Lift all Boats than Fueling Sustained Sector Rotation
Good news on the vaccine front has prompted a more convincing market repricing, as presaged by higher oil prices and long-term yields in the U.S. In turn, the most battered, cyclical sectors—energy and financials—outperformed in November. While short covering is partly to blame, the outsized moves reflect a significant rotation toward cyclicals and value, as indicated by flow data. Long-term beneficiaries of the COVID-19 shock (info tech and communication services) were not exactly left in the dust, with each posting solid 10% gains in November while still outperforming other sectors. On a sour note, real estate continued to underperform, a sign that markets have yet to price in a return to normal as certain headwinds may persist. These include work-from-home schemes and reduced business travel, in addition to a slow labor market recovery, all which impact office, hospitality and residential REITS.