To say that 2020 has been an eventful year for equity markets is somewhat of an understatement. November, with its own fair share of key developments has managed to lock in record monthly returns for equity markets. European equities, recorded their best monthly performance for the year, and across the Atlantic, US equities recorded their second highest performance since April, up by around 18 per cent and 11 per cent respectively.
Despite that European equity markets outperformed the US peers on a monthly basis, European equities still lag behind since the start of the year. The US S&P 500 Index, which broadly represents the performance of the US largest companies managed to close the month at an all-time high, with a gain of around 12 per cent since the start of the year, compared to a 6.8 per cent year-to-date decline across the European Equity benchmark, the Euro Stoxx 50 Index.
The November equity market rally followed the risk off sentiment towards the end of October, which was weighed down by US election uncertainty and the renewal of COVID-19 restrictions, particularly in Europe. Equity markets managed to more than fully recover from October lows, as market sentiment was boosted by the US election outcome and the discovery of a COVID -19 vaccine. Over the month, three separate clinical trials released key safety and efficacy results relating to the phase three trial of their COVID-19 vaccine development cycle. Pfizer and BioNTech, which were the first vaccine developers to announce the vaccine efficacy milestone were shortly followed by Moderna and Astrazeneca in its joint effort with Oxford University.
The current economic crisis is unlike previous recessions in one particular way: that it is driven by a public health crisis. The need to control the spread of the COVID -19 pandemic has triggered economic restrictions that have stalled global economic output. Therefore, the news of effective covid-19 vaccines paves the path to start vaccination process, most importantly health care workers and the most vulnerable people of the population. This in turn will allow economic restrictions to be lifted. In fact, early indications show that regulatory approvals are expected to be granted before the end of the year, as the covid-19 vaccine development cycle continues to progress at a rapid pace.
From an investment perspective, the vaccine discovery acts a key growth catalyst to the economic outlook, which together with low inflation expectations and loose monetary and fiscal policies supports an equity market recovery. November’s vaccine rally, underpinned by higher prospects of a broad-based economic recovery returned a positive performance across all sectors.
Nonetheless, sector selection mattered. The vaccine discovery triggered a cyclical rotation into value stocks, where valuation discrepancies stood at extreme levels. In European equity markets, sectors closely tied to the economic cycle, particularly financials and energy surged around 25 per cent and 34 per cent, respectively. This implies that investments in the European energy sector returned more than double the return of the broad European market index.
Similarly, in the US, the financials, energy, industrials and materials sector also outperformed the general market index. Meanwhile, investors rotated out of the more defensive sectors, including consumers staples, health care and utilities, which although traded higher, underperformed on a relative basis.
From an industry perspective, banks, oil and gas companies and auto companies benefitted the most from the vaccine rally, as the prospects for a stronger rebound in earnings in the coming months was priced in.
Disclaimer: This article was written by Rachel Meilak, CFA, equity analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd which is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.
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