A conventional recovery?

Despite the ‘known unknowns’ facing financial markets as we entered November (US elections, Brexit and continued lockdowns/COVID 2nd wave) risk assets have performed well. This is a distinctly ‘anti-consensus’ outcome. It is worth emphasising that markets were trending positively even before the mid-November announcement of successful trials from Moderna/Pfizer and subsequent vaccine developments.

A conventional recovery?

There is a considerable amount of ‘noise’ in financial markets at the moment but when we assess the underlying evidence for equities we continue to observe a reasonably conventional economic recovery and financial market response:

 • Growth expectations are improving, albeit from a low base

 • Employment trends are improving (new this month)

 • Bond yields and inflation remain low

In addition to the economic fundamentals, we are now seeing improvements from a technical perspective:

 • Trend is positive (the number of equity markets above their 50 and 200-day moving averages)

 • Global breadth is improving, signalling a wider range of individual equities performing well

 • Credit conditions are supportive, a key driver of investment and consumption

Leadership in equities is starting to shift from the beneficiaries of the slow down to the more Value and Cyclical sectors that are more geared to improving economic growth (Europe, Emerging Markets, US Value). Our positioning across all portfolios reflects this. As anticipated, we have now had a Buy Value versus Growth signal and we have taken the substantial profits in the Russell 1,000 and 2,000 Growth exposures rotating into the equivalent Value ETFs.

Valuations elevated

Equity market valuations are, understandably, of some concern. Bond yields are the main underpinning of current equity market valuations and, in time, a substantial rise in long term yields could start to unpick this relative value story. In the foreseeable future, however, governments will continue to agonise over further fiscal spending before acceding to the reality that supporting a nascent recovery will be less costly than trying to reverse a second contraction. The additional debt required for these fiscal programs will be largely funded by central banks to ensure financial conditions do not tighten materially and impede growth.

It is worth remembering that equity valuations provide no insight into the 1 – 3 year future performance of equity markets, hence we could see equity markets move from 'expensive' to 'very expensive' as this recovery gains momentum into 2021 and perhaps beyond. We are not yet at our maximum exposure to equities in all mandates, but it is probable we will be in coming months.