Market Analysis Dec 2020

Throughout the quarter, US equities experienced growth, with November standing out due to promising vaccine news. This news overshadowed the outcome of the presidential election and the unveiling of a $900 billion stimulus package in December. Despite these events, the Federal Reserve maintained its supportive stance, affirming its commitment to ongoing quantitative easing. Sectors tied to economic trends enjoyed substantial gains, while more defensive sectors made more modest progress.

The positive vaccine news contributed significantly to the ascent of European equities in Q4, particularly sectors like energy and financials that had been adversely impacted by the pandemic. However, an escalation in Covid-19 cases prompted several European countries to implement stricter restrictions. In the face of resistance from Hungary and Poland, EU leaders approved a historic €1.8 trillion budget, encompassing a €750 billion recovery fund. Moreover, the EU and the UK reached a trade agreement related to Brexit.

The fourth quarter saw UK equities outperforming, reclaiming some of the ground lost during the pandemic's initial phase in comparison to other regions. Markets responded positively to vaccine news in November and later to the Brexit trade deal. Sectors with a domestic market focus exhibited stronger performance.

The MSCI Asia ex Japan Index displayed a robust rally during the quarter, with South Korea's market index leading due to strong gains in the technology sector. Indonesia, Taiwan, the Philippines, and India also performed well, exceeding the index's performance. Meanwhile, Malaysia, China, and Hong Kong achieved more modest gains, underperforming due to tensions with the US and regulatory concerns in China.

Contrarily, Japanese equities rallied in the quarter, primarily driven by vaccine-related developments and the US presidential election outcome in early November. However, unlike most markets, a style reversal did not materialize in Japan, with value stocks only briefly outperforming and small caps experiencing significant underperformance. Current investor focus centers on vaccine distribution, Japan's election timetable, and the timing of a full corporate earnings recovery.

During the quarter, government bond yields followed disparate paths. While the US 10-year yield surged by 25 basis points to reach 0.91%, the German 10-year yield declined by 5 basis points to reach -0.57%. Italian and Spanish 10-year yields exhibited substantial declines of 32 and 20 basis points respectively, attributable to the European Central Bank's escalated quantitative easing measures. The UK 10-year yield remained nearly unchanged at 0.20%, as vaccine optimism offset Brexit uncertainties and new lockdown measures.

Corporate bonds enjoyed a robust quarter, surpassing government bonds in performance. Both investment grade and high yield bonds achieved strong positive total returns. Investment grade bonds, as the highest-rated bonds by credit rating agencies, and high yield bonds, which are more speculative, with ratings below investment grade, benefited from this trend.

Convertible bonds thrived in the wake of record-high global stocks, registering a gain of 10.7%. This implies a substantial 73% participation in the equity market's Q4 gains. The convertible bond market also experienced its most active phase in a decade, with $166 billion in new issuances in 2020. Though stemming from a low valuation base, valuations, particularly in the US, trended toward the expensive end of the spectrum.