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May 30, 2023

Ask the expert: “A bittersweet symphony for markets”

In November, the vast majority of European countries found themselves under lock-and-key again as governments tried to snuff out a rampant second wave of the Coronavirus. Even in countries like Luxembourg where lockdowns were not imposed, a social consciousness seemed to compel people to limit social interactions and stay-at-home was again the norm. Those with partners, probably lived a Sweet November scenario just like the Keanu Reeves movie, forced to spend another month of undiluted time with their partner. November was particularly sweet for markets on two dimensions…

Firstly, political uncertainty diminished with Joe Biden confirmed as the next President of the United States and President Trump accepting the outcome, formally kicking off the transition process. Fears about a contested election (and perhaps even a constitutional crisis) had been real and valid. With the elections done and dusted, Congress can now also get to work on a second fiscal stimulus.

Secondly, the possibility of a coronavirus vaccine drew closer, with two candidates yielding positive efficacy rates in trials: Moderna’s 94.5% and Pfizer/BioNTech’s 95%. This ignited a risk rally on financial markets and a style rotation out of growth stocks (such as big Tech names) into value stocks (unloved, pandemic-beaten names).

However, the optimism was diluted by the bitter reality of the here and now with Corona cases rocketing on both sides of the Atlantic. This has incited new lockdowns which poses a threat to the economic outlook. Europe is already teetering on the edge of a double-dip recession and the unemployment rate is ticking upwards. Likewise in the US, jobless claims have again turned upwards and consumer confidence has been dented by the second wave. A workable vaccine will be a gamechanger for the economy, but of course, we have to keep in mind that there are still a lot of hoops to go through before the vaccine can be manufactured and distributed to the masses.

A workable vaccine will be a gamechanger for the economy.

With investors balancing the good, the bad and the ugly, sentiment will continue to oscillate between risk on and risk off. Portfolios need to be prepared to dance to the tune of this bittersweet symphony.

Sentiment catalysts are coming from all angles – economic data, corporate news, monetary policy, fiscal policy and now vaccines – triggering at times, an opportunity for short-term traders, nervous investors and sceptics to take profits suddenly and for others with a sense of FOMO (the fear of missing out) to jump in.

As long as a scalable vaccine is not a sure thing, this temperamental air will continue. When pandemic fears dominate, markets will typically be prone to holding growth names, including stay-at-home beneficiaries. When hopes about the end of the health crisis are high, value stocks will enjoy their moment in the limelight. While we do not believe that the current environment is conducive to the prolonged outperformance of value stocks, portfolios require protection against any temporary shifts in sentiment that may arise. In order to achieve this, we have introduced some cyclicality via our sector bets, primarily by reducing exposure to Consumer Staples in favour of Industrials.

When pandemic fears dominate, markets will typically be prone to holding growth names, including stay-at-home beneficiaries.