During the month, investors received positive news about the trials of three COVID-19 vaccines, giving them the freedom to look ahead at the broadening of the global recovery, as vaccines are distributed throughout 2021.

Gabriela Santos
Global Market Strategist
Listen to On the Minds of Investors
So far, global equity markets have staged an impressive recovery from their March lows; however, the recovery has been regionally uneven. U.S. and EM Asia equity markets have fully recovered their COVID losses (and more), but other regions have only partially made up for lost ground. More than regional-specific trends, sectoral differences between markets explain this divergence in performance.
The U.S. and EM Asia markets are heavily tilted towards the sectors that have done well during the pandemic, namely the virtual world (technology, communication services, e-commerce). Other regions, on the other hand, are more heavily tilted towards the real world (cyclical sectors like financials, industrials, materials, energy, consumer discretionary), which have been held hostage by the twists and turns of the pandemic. By October 30th, differences in global sector performance were extreme with technology up 33% and banks down 40% year-to-date. As a result, the U.S. and EM Asia indices were up 3% and 12%, respectively, while Europe, Japan and EM ex-Asia were still negative year-to-date. Overall, the U.S. outperformed international markets by 10 percentage points.
However, the month of November was a good preview of which sectors, and hence which regions, stand to outperform in 2021, the year of the vaccine. During the month, investors received positive news about the trials of three COVID-19 vaccines, giving them the freedom to look ahead at the broadening of the global recovery as vaccines are distributed throughout 2021. In addition, the conclusion of the U.S. election, with a Biden administration, injected less uncertainty about foreign policy and more support to the global recovery in the year ahead. As a result, it was precisely the cyclical sectors and regions that saw the strongest performance during the month. European equity markets had their strongest monthly performance ever, while Japanese equities hit their highest level since 1991. The weakening of the U.S. dollar by over 2% also provided a boost to returns for U.S.-dollar based investors. Meanwhile, more defensive regions like the U.S. and EM Asia did well in absolute terms, but lagged in relative terms. Overall, the U.S. underperformed international markets by 3 percentage points.
This cyclical economic and market recovery is just beginning, suggesting strong performance up ahead for international equity markets. The extreme starting point for valuations and currencies should also provide an added boost to total returns. The MSCI ACWI ex-U.S. discount to the U.S. now sits at 24% versus its 20-year average of 13%. In addition, the U.S. dollar should continue to weaken over the next few years from elevated levels. It is crucial for investors to ensure they have enough international exposure in their portfolios for the new cycle ahead.
Cyclical regions have lagged in the pandemic year, but are likely to lead in the recovery
Returns are total returns in USD, cyclicals as % of index market capitalization
Source: FactSet, MSCI, Standard & Poor's, J.P. Morgan Asset Management. All return values are MSCI Gross Index (official) data, except the U.S. which is the S&P 500. Cyclicals include the following sectors: Consumer Discretionary, Financials, Industrials, Energy, and Materials.
Data are as of December 5, 2020.
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