Encouraging efficacy data for COVID-19 vaccines, and the American electorate deciding in favor of political gridlock, have improved visibility about the medium-term economic and market outlook. This triggered reduced risk premiums, a notable market rally, and sectoral rotation.
We think the rally to-date is justified. Although President Donald Trump has not formally conceded, our base case is for a peaceful transition of power in January, agreement on a fiscal package early next year, and for the Senate runoff in Georgia to result in the Republicans retaining Senate control. Meanwhile, although questions remain about the coronavirus vaccine rollout, we think one important question for the market—”Is it possible to produce an effective vaccine, soon?”—has been answered, and the answer is yes.
We believe there is upside left and retain our pro-risk positioning. Our updated central scenario forecast implies 8% upside for the S&P 500, 5% for the Euro Stoxx 50, and 7% for the MSCI Emerging Markets index by June 2021. The recovery in corporate earnings has been stronger than expected, monetary policy has been eased by major central banks in the past month, and fiscal policy is likely to remain accommodative.
Investors can find greater potential return, in our view, within sectors that have scope to “catch up” as vaccine rollouts facilitate economic recovery. We see the greatest potential in small- and mid-caps, global industrials, consumer discretionary, and US financials. In Asia, we see cyclical catch-up opportunity in semiconductors and Southeast Asian financials. We have, however, shifted our view on commodities from positive to neutral, after a 6% rally in the asset class in the past month (based on the CMCI TR Commodity Index).