Global equities finished last week at a record high and, with gains of 13% so far in November, are set for their best monthly gain on record. Along with recent positive data on vaccine development, the latest rally partly reflects reduced US political uncertainty following President Donald Trump's decision to start cooperating with the Democratic transition team.
We believe the rally can continue, with the current pipeline of expected vaccine rollouts in line with our central scenario of widespread availability in 2Q21. We also believe that a divided US government—which looks the most likely outcome—is no impediment to a rising market. Since 1928, median annual returns for the S&P 500 have been close to 12% under both unified US governments—with the same party controlling both the White House and Congress—and under divided governments. But market leadership has started to shift. In 2020, the top mega-cap US technology stocks (Facebook, Apple, Amazon, Microsoft, and Google) are up 47%, versus 4% for the market excluding these companies. In the next phase, we expect the rally to broaden and for the recent shift in market leadership to continue. We also see opportunity in longer-term themes.
1. Cyclical and value stocks have started to outperform growth stocks as optimism over a COVID-19 vaccine has increased, and we expect this trend to continue. MSCI Europe, which has a more cyclical bias, is up 8.3% since the day before Pfizer's positive vaccine data was released on 9 November versus 3.7% for the S&P 500, which has a greater exposure to growth stocks. Even after this relative outperformance, year-to-date Europe has still underperformed the US by around 16 percentage points. Meanwhile, the US small-cap Russell 2000 index, which also has a cyclical bias, is on track for its best monthly performance on record, going back to 1979, with total returns of 20.6% so far, but still lags large caps by 4 ppts year-to-date. In November the Russell Value index has risen 14.5% and the Russell Growth index 10%, but year-to-date value has still underperformed growth by 33%. Heading into 2021, we expect outperformance from US mid-caps and EMU small- and mid-caps.
2. Seek exposure to technology beyond the mega-cap stocks, toward “The Next Big Thing.” Since 1973, if a US equity sector was a top two performer over the previous 10 years, it had only an 8% chance of staying there over the next 10 years, and a 25% chance of falling into the bottom two. This pattern suggests that “The Next Big Thing” probably won’t come from the top two sectors of the last decade: technology and consumer discretionary. Instead, if the last decade was about investing in the technology sector itself, we think the next decade will reward investing in the disruptors in sectors undergoing technological transformation. We see the greatest growth potential for companies exposed to the 5G rollout, fintech, healthtech, and greentech. For more detail on "The Next Big Thing," click here.
3. The incoming administration of President-elect Joe Biden is likely to add momentum to the green agenda, a growth area for investors over the coming decade. The Biden administration is unlikely to be able to gain approval for its proposed USD 2tr investment in green energy, if, as we expect, the Republicans maintain control of the Senate. But the early appointment of former Secretary of State John Kerry as special presidential envoy for climate suggests green energy will be a White House priority. We expect the administration to use executive orders and other regulatory tools to promote sustainability. US states and governments around the world, meanwhile, are making emission reductions a core policy focus. For more detail on buying into sustainability, click here.
So, while we see upside potential for the market overall, we believe investors will need to diversify to get the best performance in the next leg up. Click here for more detail.
Global equities finished last week at a record high and, with gains of 13% so far in November, are set for their best monthly gain on record. We believe the rally can continue, but market leadership has already started to shift. In the next phase, we expect the rally to broaden and the recent shift in market leadership toward cyclicals and value to continue. We also see opportunity in longer-term themes.