Weekly View - Trying to save Christmas
As the virus once again takes hold in Europe, most of the continent will spend the coming month in confinement to a greater or lesser extent. This, against a background of delays to rollouts of vaccines and last-minute wrangling over EU recovery funds, justifies our decision to go underweight European equities and to build up portfolio protections. The US elections this week could give rise to a number of vastly different scenarios for risk assets. Markets wavered last week as participants began to doubt whether we will have a 'blue wave' (a Biden win and Democrat control of Congress) and fears rose that the result will be contested. As we await more clarity, we believe it is too early to move from our underweight in US equities.
At the same time, while Q3 earnings news was largely positive, companies that fell short of expectations found themselves penalised by markets (perhaps overly so), with some names losing as much as 25% of their value. These disproportionate reactions present a perfect opportunity for stock-pickers. We are also seeing examples of how the present uncertain environment has led to revised pricing of specific M&A deals to relatively attractive levels.
As the US heads into an election with wide-ranging consequences and Europe goes back into lockdown, China is setting out its path to growth for the years ahead. While we await the details from last week's meeting of the Chinese Communist Party on the five-year plan to run from 2021-2025, the overall theme of self-reliance is clear. Trade wars with the Trump administration have strengthened resolve to promote the domestic economy. Likewise, the Party is determined that China should become a leader in tech innovation and attract foreign investment. It wants per-capita GDP to "reach the level of moderately developed countries" by 2035. If we look, say, at Spain or South Korea as benchmarks, that means tripling from today's levels in nominal terms. But few would bet against this ambitious target being achieved, and we remain upbeat on Chinese assets (renminbi, bonds and domestic stocks).