November has been by far one of the most interesting months since the spike in volatility that hit us all last February. By now, many of you who follow financial markets in general would have realised the impact the recent sequence of events – the US presidential election and vaccine announcements – have had on the markets’ performances and one’s investment portfolio. The impact overall has been positive, witnessing some strong positive momentum week-on-week. However, I shall here delve into more detail as to how the various asset classes, sectors and bond yields were specifically impacted – with a focus on the US and European regions.
The two broad equity indices, in the US and Europe both recorded double-digit gains since the end of October, albeit the US lagging Europe by circa 3.3 percentage points at the time of writing. More specifically, the S&P 500 index appreciated by 11%, while the Eurostoxx 600 index was up by circa 14.3%.
Despite Europe’s outperformance in November, the gap between the two regions since the beginning of the year is still substantial – Europe down six per cent, while the US up by just under 13% or so, or a 19% gap.
The S&P 500 index has by far a larger weighting in companies that benefitted from the stay-at-home trade, such as Amazon, Facebook, Alphabet (Google) and Netflix. On the other hand, the weighting of such companies in the European index is rather subdued, with healthcare, industrial goods and services and food, beverage and tobacco accounting for over a third of the index weighting – not to mention that over a fifth of the index is exposed to the UK.
One might, therefore, expect to witness a stronger recovery in companies and sectors that were worst impacted because of the COVID-19 pandemic; in particular, companies with exposure, directly or indirectly, to the entertainment and leisure industries, and small- to medium-sized companies. Companies with a small market capitalisation, or indices tracking such companies, will usually experience larger downside swings in times of heightened economic crises.
In fact, the rotation effect we have started to see since August was boosted in November, especially as vaccine announcements by Pfizer and Biontech, Moderna and, more recently, AstraZeneca, fuelled investors’ positive sentiment. This was vividly reflected in November, with much stronger gains recorded across small-cap and value stocks which were the primary laggards during the pandemic.
Looking at the US Russell 2000 Index, which measures the performance of about 2,000 of the smallest-cap US companies, it is quickly catching up the large-cap S&P 500 index, following a staggering 20 per cent rally since the turn of the month – leaving it only two percentage points behind its big-brother index since the beginning of 2020.
Despite the outperformance recorded against both the S&P 500 index, as well as against the tech-heavy NASDAQ 100 index (+9.6% since October 31), the latter is still the overall winner this year, up by close to 39%.
In Europe, the situation remains relatively bleak on a year-to-date basis. November was likewise stronger for the small-cap end of the equity spectrum, with the FTSE Europe Small Cap index recording an astonishing 19% appreciation. This not only translates into an outperformance over the month, but it outpaced the Stoxx 600 index since the beginning of the year by over five per cent, to recover almost all of the declines recorded earlier on.
One particular segment of the market, which perhaps attracts the interest of a number of traditionally dividend-seeking investors, is banks. It is interesting to point out that European banks recorded a +34% return since the beginning of the month, and yet still they are still down by around 22% since the start of 2020.
The asset class in Europe recorded gains just north of 4%, as per the Markit iBoxx Euro Liquid High Yield Index, whereas the ICE BofA US High Yield Constrained Index is lagging by some 0.5% over the month, having appreciated by around 3.8%. Nevertheless, on a year-to-date basis, the US index is still ahead of the European counterpart, with the latter just breaking even on a total return basis.
Shifting onto the higher-quality end of the fixed-income spectrum, gains were likewise observed, but undoubtedly of a much smaller magnitude. The EU and US broad investment grade corporate bond indices recorded an appreciation of circa 1% and 2% respectively. The relative outperformance on the US front was not just recorded in November, but likewise since the beginning of the year – with the ICE BofA US Corporate Index up by over 8% since the beginning of the year, as opposed to a gain of just under 3% recorded in the Markit iBoxx EUR Liquid Corporates Large Cap Index. Therefore, one will note that the positive sentiment brought about across financial markets over the past few weeks lifted all sorts of investment asset classes.
As expected, the risk-on mode triggered at the beginning of the month initially led to a jump in government yields, with the US 10-year Treasury yield up close to 1% on November 9. Meanwhile, the German 10-year bund initially increased to a negative 0.48% before reversing most of the shift as ECB head Christine Lagarde hinted at further monetary stimulus before the end of the year.
As a concluding remark, ensuring the right balance in one’s portfolio between fixed-income and equity assets is essential in determining and managing risk and return expectations. Similarly important is that one ensures that enough diversification within a portfolio’s underlying asset classes. Specific sectors and asset classes might have benefitted most during parts of an economic downturn or rebound, but others might end up benefitting more during different stages of the economic cycle.
As such, it is futile to stay chasing the best performing asset class during any one particular period or to perfectly try to time entry and exit points.
In my view, the most effective strategies are the ones that focus on the long-term strategic balance that best fit one’s risk profile, needs and objectives, and less on the tactical side focused on the short-term market and economic scenario.
This article was prepared by Colin Vella, CFA, head of wealth management at Jesmond Mizzi Financial Advisors Ltd. This article does not intend to give investment advice and the contents therein should not be construed as such. The company is licensed to conduct investment services by the MFSA and is a member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For more info, contact Jesmond Mizzi Financial Advisors Ltd of 67, Level 3, South Street, Valletta, call on 2122 4410, or e-mail colin.vella@jesmondmizzi.com.