Looking on the bright side of life

2020 has been a year of extraordinary challenges because of the COVID-19 pandemic, which has infected 80 million people worldwide and resulted in 1.8 million deaths. It is estimated that the global economy contracted by 4.4% in 2020 according to the International Monetary Fund, and this is after gigantic fiscal packages from governments around the world and ultra-loose monetary policy from central banks. The pandemic also altered the lives of billions of people, from social distancing measures and suspending travels to working from home. 

Despite these tremendous changes, financial assets ended the year generally on a positive note. Massive monetary stimulus supported market liquidity and investor sentiment, reinforcing their belief that the central banks will do all they can to avoid a re-run of the 2008 global financial crisis. Fiscal policies also provided some much-needed lifelines to companies. The breakthrough in vaccine development gave investors a glimmer of hope that the beginning of the end might be close. The outcome of U.S. elections, even as we wait for the final results from the January 5 Senate run-off in Georgia, seem to point toward a more stable and predictable policy backdrop in coming years. 

As we look toward 2021, the road to recovery is long and still full of uncertainties. Fortunately, we believe this economic rebound is more a question of when, rather than if. Risk asset prices have already reflected a significant part of this constructive scenario, but Asian investors still need to stay invested to benefit from the upcoming phase of the global recovery, as well as many existing and emerging structural trends. 

Central banks focusing on the near-term challenges

The COVID-19 pandemic continues to be a tale of two halves. Amid the positive news of vaccine development and approval, the number of people infected around the world continues to rise at a rapid rate. 

Following positive trial results from a number of vaccines in November and subsequent approval by relevant regulatory bodies, the vaccination program has started in the U.S. and Europe. Many governments are still working through the logistics of distributing vaccines and determining who should be prioritized to be inoculated. In the U.S., over 4 million people had already received the first dose by the end of December, according the U.S. CDC. President-elect Biden has pledged to vaccinate 100 million people in the first 100 days of his administration. 

While the biggest vaccination program in the world’s history is underway, the spread of the virus continues. The UK has identified a new strain of the COVID-19 virus (N501Y) that is spread more easily, which has triggered new travel restrictions between the UK and a number of countries around the world. This has also forced a number of governments to extend stringent lockdown and social distancing measures, which would imply a blow to the services sector. This could raise the risk of economic contraction in 4Q and entering 2021.

Taking into account the rise in infections and damage to the U.S. and European economies, their central banks are committed to keep monetary policy accommodative. The Federal Reserve left its asset purchase program unchanged (USD 80 billion (bn) per month in U.S. Treasuries and USD 40bn in mortgage-backed securities) and pledged to do more if the economy slows. Meanwhile, the European Central Bank (ECB) expanded its asset purchase program by EUR 500bn to EUR 1.85trillion and extended purchases to at least the end of March 2022. 

The art of the deals

The pandemic was not the only thing that policy makers were focusing on. A number of important deals were made in December that either helped to boost short-term economic performance or will have long-term implications. 

Starting with the U.S., the USD 900bn fiscal stimulus program was finally passed by Congress and signed by President Trump. This included a USD 600 check per person for those with annual income less than USD 75,000. Unemployment benefits were extended to mid-March. The Paycheck Protection Program has been renewed and funding was made available to schools and local governments. This should help the U.S. economy to avoid a double-dip recession despite a challenging 4Q 2020. 

In Europe, the UK and the European Union (EU) finally agreed to a trade deal on December 24, and this helped to avoid a no-deal scenario for the UK when the transition period ended on December 31. This deal helps to avoid tariffs and quotas for trade in goods, even though more paperwork will be introduced, and some rules will be applied to the movement of people between the UK and the EU. 

The EU and China have also signed the Comprehensive Agreement on Investment that would allow better access to the Chinese market by European companies, especially in sectors such as automobile, financial and business services. This would reduce or eliminate the need for joint venture requirements in selected services. 

Global economy:

• The surge in new infections in the U.S. and Europe has prompted lockdown measures being reintroduced, which could have an impact on the services sector, even though manufacturing data remains robust. A new strain of the COVID-19 virus is thought to be more able to spread, which led to a few countries announcing new travel restrictions to the UK, where this new strain was first identified. Vaccination has started, and it is expected to accelerate going into the new year once the logistics and administrative aspects are worked out.
  (GTMA P. 12, 13)
• The Federal Reserve extended its asset purchase program at the December Federal Open Market Committee meeting, although it fell short of buying a greater portion of long-dated bonds. The U.S. Congress finally passed a USD 900bn fiscal stimulus package that should support the economy at least for the first three months of 2021 and help support households and businesses hit by the latest wave of the pandemic. The ECB also added EUR 500bn to its asset purchase program as well as extended it to March 2022.
  (GTMA P. 18, 19, 27)

Equities:

• Despite the challenging pandemic environment in December, global equity markets continue to focus on long-term positive factors. The S&P 500 was up 3% in the month, and the NASDAQ was up 5.5%. European equities also rode on the November momentum into December. The Brexit deal on Christmas Eve helped the FTSE 100 generate 4.6% in the month, despite being down 13% for the full year of 2020.
  (GTMA P. 29, 30)
• Selected emerging markets were able to deliver strong performance in December. In Asia, South Korea, Taiwan and India outperformed with high single digit to double digit returns in the month. Chinese tech companies were weighed down by concerns of anti-trust laws. Beyond Asia, Brazil, Turkey and Mexico all enjoyed strong gains with the possibility of better growth in 2021. In the case of Turkey, greater determination to stabilize its currency from the central bank helped to reinforce investors’ confidence.
  (GTMA P. 29, 32, 35)

Fixed income:

• The U.S. Treasury (UST) market was broadly stable in December with the 10-year yield ranged narrowly between 90 basis points (bps) to 97bps, despite the strong run in the equity market. This is partly due to the Fed’s commitment to asset purchases and keeping yields low. The UST yield curve continues to steepen with the short end of the curve well anchored. The ECB’s expansion of asset purchases has pushed European government bond yields lower, especially for peripheral European countries and longer-dated bonds.
  (GTMA P. 46, 47)
• Stronger risk appetite and low risk-free rates have helped to narrow corporate credit spreads. The U.S. high yield benchmark credit spread narrowed by 55bps in the month to 446bps, almost back to where it was before the pandemic broke out. The same applied to emerging market fixed income, with the high yield segment benefiting most from the hunt for yield.
  (GTMA P. 45, 53, 54, 55)

Other assets:

• Crude oil (WTI) gained 6% in the month, with investors looking forward to recovery and prospects for demand improvement. However, we remain concerned with the prospects of additional supply from oil producers once demand picks up. Gold rebounded modestly on a weaker U.S. dollar (USD) and pushed back above USD 1890 per ounce.
  (GTMA P. 63-65)
• Stronger risk appetite also coincided with a weaker U.S. dollar, with the USD index down 2.4% in the month. The Australian dollar benefited from a rebound in commodity prices, especially in industrial metals, despite trade tensions with China. The British pound was also supported by the Brexit deal between the UK and the EU,  avoiding the worst-case scenario of a no-deal Brexit
  (GTMA P. 60, 61)