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December global market commentary: Equity markets continue their rally

06 January 2021

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by Peter Little, Fund Management

Equity markets continued their rally in December (MSCI World +4.2% MoM), leaving global markets up 15.9% for 2020 – 70% up off the lows reached on 23 March as the global pandemic initially took hold. Despite expectations that global economic output will shrink by 4.4% in 2020 (by way of comparison global economic output was roughly flat in 2009 during the global financial crisis) and an acceleration in global COVID-19 infections, many from a mutated strain, investors were able to look through the gloom. December started with US infectious disease expert, Dr Anthony Fauci, predicting that most Americans would be vaccinated by 2Q21, leading to herd immunity by the Northern Hemisphere summer.

US congress went back and forth on an additional fiscal stimulus package, which President Donald Trump eventually signed into law just before year-end. The $900bn package includes $600 checks for eligible American adults and children. Emerging markets (EMs) had the strongest rally into year-end (MSCI Emerging Markets +7.4% MoM) doing enough in 2020 (+18.3%) to outperform developed markets. Russia, Brazil, and India saw their equity benchmarks rally by 10.2%, 9.3% and 7.8% MoM, respectively. EM currencies also had a strong month (Turkish lira +5.4% MoM, South African rand +5.3% and the Russian ruble +3.3% MoM against the US dollar), with US dollar weakness partially responsible as the greenback fell against most major currencies (Swiss franc +2.7%, euro +2.4%, Japanese yen +1% MoM) and the US Dollar Index ended the year 6.7% weaker. The British pound also rallied against the US dollar (+2.6% MoM) as Prime Minister Boris Johnson made some last-minute concessions on fishing rights to allow the UK to leave the European Union at the end of 2020, with a trade deal in place with their biggest trading partner.

Large-cap tech stocks also ended 2020 strong, cementing their position as the biggest winners in the pandemic-hit year. The NYSE FANG Index of US-listed tech heavyweights rallied by 10.4% in December to end 2020 103% higher. The December NYSE FANG rally was largely an electric vehicle story, with Chinese search engine giant, Baidu, soaring 55% in December on news that it would start building its own electric vehicles and Tesla rallying by 25% MoM to end the year 743% higher.

US banks were amongst the best-performing stocks in December (S&P 500 Financials +6.3% MoM), as regulators gave the green light for them to resume share buybacks. However, the December rally was not enough to push US financial stocks into the green for the year, with S&P 500 financial stocks ending 2020 down 1.8%, while S&P 500 real estate and energy stocks were the only other sectors unable to deliver gains for shareholders last year (-2.2% and -33.7%, respectively, for 2020). Brent crude oil also ended December stronger (+8.8% MoM) at $51.20/bbl, though it is still 21.5% below where it started the year. US 10-year bond yields edged closer to 1% (0.91%) as the US Federal Reserve pledged to continue with quantitative easing until employment and inflation were substantially higher.

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