For markets, November was dominated by rising Covid hospitalisations in parts of Europe and concerns about the new Omicron variant. Having started the month well, developed market equities ended the month down 2.2%. Government bonds rallied. 

Among the major western economies, the sharp rise in Covid hospitalisations has so far been limited to parts of Northern Europe. Austria, Belgium, Germany, the Netherlands, Switzerland and Ireland have all seen ICU admissions rising sharply. In contrast, hospitalisations in the UK, US, France, Italy and Spain have not been rising at an alarming rate. 

The extent of restrictions imposed so far has varied with the number of hospitalisations. For example, in Belgium and Germany, work from home restrictions have been implemented while Austria is now under full lockdown. Meanwhile in the UK, where booster jabs so far seem to be doing a good job at limiting hospitalisations, masks are required on public transport and in shops but not in bars and restaurants and people have not been encouraged to work from home. 

So far, nobody knows whether the mutations in the Omicron variant will significantly reduce the effectiveness of existing vaccines in preventing hospitalisations. This is clearly the key issue to monitor over the coming weeks. Even in the worst case scenario that vaccine efficacy is significantly reduced, drug companies seem confident that they could produce new vaccines within about three months. New antiviral pills could still also help to reduce hospitalisations, once they are available within a few months. So it’s unlikely that, even in the worst case scenario, equities would experience the same degree of declines that were seen at the start of the pandemic when nobody knew whether vaccines would ever be available. 

Exhibit 1: Asset class and style returns

Source: Bloomberg Barclays, FTSE, MSCI, Refinitiv Datastream, J.P. Morgan Asset Management. DM Equities: MSCI World; REITs: FTSE NAREIT Global Real Estate Investment Trusts; Cmdty: Bloomberg Commodity Index; Global Agg: Barclays Global Aggregate; Growth: MSCI World Growth; Value: MSCI World Value; Small cap: MSCI World Small Cap. All indices are total return in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 30 November 2021.

November also marked the start of the UN Climate Change Conference (COP26) where leaders from around 200 countries convened, with hopes that they would take decisive actions to limit global warming to less than 1.5°C versus pre-industrial levels. However, as we discussed in our On the Minds of Investors publication, “COP26: Not a failure, not a success”, while several new announcements were made in areas including coal, deforestation and methane emissions, progress fell short of the scale and specificity required to give us confidence that disruptive climate outcomes can be avoided. Nevertheless, later in the month, climate change turned out to be one of the areas where Xi Jinping and Biden agreed to work together during their virtual summit. 

Before Covid concerns rose, there were encouraging signs on the economic front, with the J.P. Morgan Global All-Industry Purchasing Managers Index (PMI) increasing 1.2 points in October and the flash PMI for November generally better than expected for most countries. 

US

The US Consumer Price Index (CPI) jumped to 6.2% year-over-year in October, its highest reading in 31 years. Retail sales proved resilient growing 1.7% in October, showing that for now concerns over inflation remain outweighed by other factors such as the strength of the labor market. Indeed, non-farm payrolls rose by 531,000 in October, well above the consensus estimates of a 450,000 gain, while in November only 199,000 Americans filed for initial unemployment benefits, the lowest number since 1969. 

On the policy front, Jay Powell was reappointed for a four-year term as Federal Reserve Chairman. The current plan is for monthly bond purchases to be reduced from $120 billion to zero by the end of June 2022. Several Fed members, including Powell, have talked about speeding up the pace of tapering but uncertainty around Omicron could now make that less likely in the near term. Finally, Biden signed a long awaited $550 billion bipartisan infrastructure bill in order to upgrade America’s roads, bridges and railways and deploy electric vehicle charging stations across the country. The S&P 500 ended the month down 0.7%.

Exhibit 2: World stock market returns

Source: FTSE, MSCI, Refinitiv Datastream, Standard & Poor’s, TOPIX, J.P. Morgan Asset Management. All indices are total return in local currency, except for MSCI Asia ex-Japan and MSCI EM, which are in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 30 November 2021.

EURO AREA

In Europe, economic data were mixed in November. On the positive side, the euro area PMI flash survey rebounded to 55.8 (+1.6) after three consecutive months of decline. However, some diverging trends appeared beneath the surface, with the French Insee Business survey increasing while the German IFO business climate index dropped. This divergence can at least partially be explained by the fourth Covid-19 wave, which has so far been more acute in Germany than in France. Several countries, have already reintroduced new mobility constraints to curb the spread of the virus. These measures, together with inflation reaching 4.1% year-over-year in October, have weighed on consumer sentiment, which has decreased slightly in recent months but remains at pre-Covid levels. Covid concerns led European equities to decline by 2.5% over the month and government bonds rallied.

On the political front, the leader of the German Social Democrats (SPD) is set to become the new German chancellor. The SPD, the Greens and the Free Democratic party (FDP) signed a coalition agreement with ambitious climate targets, such as phasing out coal from Germany’s energy mix by 2030, well ahead of the original schedule.

UK

Economic momentum remained strong in the UK thanks to the fact it has so far been less affected by the latest Covid-19 wave. In this context, consumer confidence and retail sales increased, in contrast to what has been observed in the rest of Europe. Labour market data for October, the first month without the government’s furlough scheme, continued to strengthen. In terms of business activity, the flash PMI for November dropped slightly from 57.8 to 57.7, but this was still better than expected and has also shown some underlying improvements in terms of supplier delivery times, which was encouraging ahead of the Christmas season. The FTSE All-Share fell 2.2%. Gilts rallied on the back of the Bank of England’s (BoE) decision to keep rates on hold in November and on concerns that Omicron could further delay rate rises. Sterling also fell over the month. 

Exhibit 3: Fixed income government bond returns

Source: Bloomberg Barclays, Refinitiv Datatsream, J.P. Morgan Asset Management. All indices are Bloomberg Barclays benchmark government indices. All indices are total return in local currency, except for global, which is in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 30 November 2021.

EMERGING MARKETS

October macroeconomic data for China showed an improvement in both external demand and domestic activity. China’s exports continued to surprise to the upside for the third month in a row, with growth of 27% year-over-year in October, driven by strong demand from Europe. On the domestic front, retail sales were ahead of expectations as well rising 4.7% year-over-year in October along with news of record sales being generated during Singles Day. Industrial production also beat market forecasts with a 3.5% year-over-year rise in October. While EM’s economic backdrop improved over the last couple of weeks, EM equities and EM debt posted negative returns of –4.1% and –1.4%, again hampered by covid concerns.

Exhibit 4: Fixed income sector returns

Source: Bloomberg Barclays, BofA/Merrill Lynch, J.P. Morgan Economic Research, Refinitiv Datastream, J.P. Morgan Asset Management. Global IL: Barclays Global Inflation-Linked; Euro Gov.: Barclays Euro Aggregate Government; US Treas: Barclays US Aggregate Government - Treasury; Global IG: Barclays Global Aggregate - Corporates; US HY: BofA/Merrill Lynch US HY Constrained; Euro HY: BofA/Merrill Lynch Euro Non-Financial HY Constrained; EM Debt: J.P. Morgan EMBIG. All indices are total return in local currency, except for EM and global indices, which are in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 30 November 2021.

Conclusion

As we discuss in our Investment Outlook 2022, “Easing off the accelerator, nowhere near the brake”, in our base case we continue to expect positive growth and for inflation to remain above central banks’ targets during 2022. While monetary policy should marginally become less favorable in 2022, we believe that the normalisation process will be gradual and that fiscal policies will remain accommodative. There are of course risks to this outlook, particularly the resurgence of Covid-19 and the potential effect of the new variant if, in the worst case scenario, it is shown to evade the existing vaccines. It was this risk that dominated markets in November despite otherwise strong economic data. We should know by the end of the year whether Covid and particularly the Omicron variant will materially disrupt what would otherwise be a pretty positive economic outlook. 

Exhibit 5: Index returns for November 2021

Source: Bloomberg Barclays, MSCI, Refinitiv Datastream, J.P. Morgan Asset Management. Past performance is not a reliable indicator of current and future results. Data as of 30 November 2021.