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.
With the vaccine helping to normalize economic activity, we continue to think Small-Caps look more attractive and sustainable than Value stocks as a reflation play through equity factors. In a growth-starved world that is accompanied by global excess supply, slow economic growth, and low interest rates, Value companies have faced relentless disruption from New-Economy stocks that are leading the world leaping onto digital transformation. Technology adoption is accelerating not only because COVID-19 is restricting social mobility, but also because of how technology is enabling new firms to quickly emerge and grow by transforming even the oldest industries—think of Tesla, which has disrupted century old car makers, or Uber, which caused an earth quake to the transportation.
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.
Upon positive vaccine developments, we think overweighting higher-beta and cyclicals look tactically attractive. Longer-term, however, energy and financials will continue to face headwinds even as the COVID-19 storm is largely behind us. Structurally low interest rates and weak global growth will continue to weigh on margins for financials, while oil markets are likely to face persistent demand headwinds related to consumer behavior, environmental regulation and the electric vehicle revolution. These factors can explain why analysts’ EPS growth projections have not been revised meaningfully higher for cyclicals such as energy, industrials and financials. Meanwhile, sectors such as info tech, healthcare and communications, which benefit from COVID-19-induced tech advancements, remain at the top of the pack.
Outlook and Positioning: Dialing-up global equities
Elsewhere, our positioning remains unchanged with an overweight to U.S. and EM equity markets, funded by Canada and EAFE. We continue to prefer IG corporate bonds to Federals or riskier high-yielding bonds. We are maintaining a small duration overweight as a hedge against downside on our increased equity stance. While the loonie has surprised us to the upside in recent months, its ascent continues to evolve in the global context of a weaker U.S. Dollar. Unlike equities, however, currency prices are relative measures, and as such there are limits to how high the loonie can fly, notably because of the meaningful rise in the twin deficit.