November 2020 Review
What a month?! The nervousness over Covid-19’s second wave and the US Presidential Election pushed Brexit withdrawal onto the back burner at the start of November. Volatility, as measured by the VIX future, was elevated at 37 – it would end November at 21. By the end of the month, a number of records had been broken with one, maybe more, to come in December. The MSCI World Equity Index hit a record high in November and was up 12.7% on the month – a month in which the tide floated many boats.
An Injection of Optimism
The prospect of a blue wave, whereby the Democrats would win both the Senate and House of Representatives, became increasingly less likely as results came in after the November 3rd US election. The following days indicated a Democrat win for Joe Biden but also a refusal to concede defeat from President Trump, citing voting fraud – without substantiation. While that news story rumbled on for the rest of November, the announcement on the morning of November 9th of a vaccine for Covid-19 with 90% efficacy (later upgraded to 95%), provided the pivotal event for financial markets in November. After the initial announcement from Pfizer/BioNTech, subsequent vaccine announcements from Moderna and Astra Zeneca/Oxford University continued to buoy equity markets.
A Dash for Trash
While last March had witnessed a ‘dash for cash’ from investors, November 9th’s announcement prompted a ‘dash for trash’ where those stocks heavily exposed to human movement and deeply in negative territory in performance terms year to date, staged a ‘phoenix from the ashes’ style recovery as investors looked for ‘bargains’ exposed to a broader economic recovery or covered their shorts or underweights. Airlines, travel companies, retailers and financial stocks rose sharply as those shorts were covered and transferred to the winners of the previous months – those exposed to the digital economy.
The Only Way is Up
Or so it seemed for equity markets in November. Pretty much every stock market was in positive territory, and most by a healthy margin, with some broader indices making new highs. Government bonds generally did the opposite with yields rising, the US Treasury approaching a yield of 1.00%. Corporate bond yield spread tightening helped holders of those assets to do better than their relative government bond counterparts. Gold lost some of its lustre falling over 5% over the month on fears that an economic bounce back will translate into higher real yields – a valuation challenge for the yellow metal. Copper on the other hand powered ahead, aided by the prevailing economic optimism. Oil took part in the recovery story as increased economic output globally should aid demand for the black stuff.
But equities were the place to be as for the first time in many months, the tide of optimism lifted a broad cross-section of sectors and market capitalisations. While the US S&P500 Index was another index to crest new highs, rising over 10% on the month, the industrials-heavy Euro Stoxx 50 was up over 18% in November and the FTSE 100 up just over 12%. For context, both the Euro Stoxx 50 and the FTSE 100 are still well in negative territory for the year while the S&P500 is up over 12% for the year to end November 2020.
Another record will occur in December as a result of the announcement in November that Tesla will become a member of the S&P500 Index on December 21st as we mentioned in November’s mid-monthly update. It will become the largest ever entrant to that index by size of company. Tesla’s $550 billion market capitalisation will make it the sixth largest company in the S&P500 Index. Of course, this will force legions of passive investors to buy Tesla as it has recorded four consecutive quarters of profit, earning it a place in the S&P500. Now Tesla may be the future and led by a visionary – it’s something of a marmite company – but it will be entering that index after rising astronomically by 778% over the past twelve months to end November. It was up 38% in November alone, aided by non-passive ‘investors’ front running their passive counterparts.
What Did We Do?
We try to look six to nine months ahead and beyond so had built in some improvement in economic activity most likely boosted by an effective vaccine sometime in the first half of 2021. As such, we had already begun trimming the winners from the digital economy earlier in the autumn in favour of a sustainable theme – energy transition through a fund that enjoyed a 24% positive month in November. Gold was also trimmed and cash too, to reflect an even better outlook for equities, adding a fund with value in its name but where value refers to growth companies trading cheaply to where the manager believes they should.
There was much talk of a rotation from ‘growth’ to ‘value’ stocks in November. Whatever characteristics you assign to those convenient yet inaccurate labels, the earlier than expected vaccine announcement on November 9th caused a significant amount of short covering from hedge funds and their like. That may have magnified the move upwards in the prices of previously unloved and challenged businesses. However, our focus remains on long term growth themes rather than indices so the investments we make are not going to be in recovery industries that remain challenged by capital and labour intensity, and thin margins requiring high volumes. We will remain exposed to long term growth themes through financially-strong, low leverage, high free cash flow businesses.