November 2020 will go down into the history books as one of the best months ever for financial markets. In the equity space we got double digit returns almost anywhere. Indices and countries with some value tilt did much better than this. Companies facing enormous difficulties in today’s pandemic in the transportation or hospitality sector recorded impressive runs; up 40%, 50%, 60% in a matter of few trading sessions. A month like November did save most of the value guys that got caught off guard by the outperformance of the quality and momentum factors since last spring. Couple this with a generally benign environment for corporate credit along the rating spectrum even in emerging markets and 2020 is going to be archived as a very benign year for investors. True, government bonds and gold recently retraced a bit but they can still show significant positive performance year to date. Everyone is happy in financial wonderland. The news regarding the vaccine for Covid-19 are the main contributors to this positive attitude. Pfizer/Biontech, Moderna and Astrazeneca announced positive achievements on this front in a matter of days. The results are very good. “Efficacy” really surprised on the positive side. These are a clear testament that science is a very powerful force in today’s world. I believe this will have lasting effects on society and the ideologies of future generations. With a vaccine available for the masses on the horizon, we can look for a much better 2021 for the economy and earnings. How much is it already in the price? This is the most important question for investors but, frankly speaking, for the time being, it does not matter much. Collectively, we all want to close this very tiring 2020 without further emotions and I think it is what will happen. It will be a problem on Q1 next year when these hopes must turn into reality. However, besides vaccines, in November there was another very important event: the US elections. In line with the polls, for once, Biden won the race and he is going to be the next president. In line with expectations, Trump did not accept the results. Until the end of October, the fear of a contested election was a very scary scenario. We got it but the market soon moved over. Honestly, given the amount of money spent for protection and the shape of the VIX curve I was surprised that this evidence did not cause more turbulence. Anyway, it was what it was. Life goes on. So, what we have to expect from the new administration as far as financial markets are concerned? The consensus view is that we will get more fiscal stimulus, fiscal and monetary policy will move in tandem (Janet Yellen nomination fits the bill), inflation will come back but moderately so and yield curves will behave, no tax reform is in sight because the balance in congress does not allow to do so with positive feedback on the earnings outlook. Boom, goldilocks again, this time with a fiscal twist. How should investors position for this new environment? Well, there are not certainties, but I can tell you what we are thinking. We got to run portfolios with higher risk than in the past. It is inevitable because “There Is No Alternative” for us too. We are constructive on developed market credit because this is the asset class closer to the action of central banks. In the equity space, we believe that this administration change does not impair the positive trend in the market, at least for now. In spite of this, it does change the quality and the internal leadership, either geographically and on a sector basis. With Trump we got to invest thinking “America First” and America delivered first class results. With Biden I guess we can switch to an “America Second” mindset. The US dollar weakness should boost flows and returns outside of the US, with emerging markets benefitting the most. So, we overweight Asia and, after many years, we are more constructive even on Europe. Both areas offer better “Value” than Large Cap US. As far as the US (still 70% circa of MSCI World exposure), we believe that this is the right time to be long “S&P equal weight” versus the usual market cap weighted one. We maintain a positive stance on gold miners via the GDX index. Other sectors will eventually take the new leadership from Large Cap Tech but it is too early to get a clear picture. We leave this topic for one future commentary.
With this, I conclude the last commentary of 2020. This has been a very challenging year. I hope that you and all your family managed to go through it in good health and wish you all the best for upcoming holiday season. See you in 2021.