08 December 2020
This report has been prepared by Northcape Capital, the underlying investment manager for the Warakirri Ethical Global Equities Fund.
As the US election outcome in favour of Biden but with a Republican senate became clearer and several vaccine breakthroughs were announced, equity markets started to rally and MSCI World ended the month +12.8%.
Whilst all sectors were up in November, the most cyclical sectors led, with Energy +28.2%, Financials +19.2% and Industrials +15.7%. This was at the expense of Utilities +5.0%, Consumer Staples +78% and Healthcare +8.9%. Europe and the UK outperformed the US, boosted by some slowing COVID infection rates in the former and hopes a “no-deal” Brexit might be avoided for the latter. Partly an outcome of these moves and partly a distinct rotation shift was the outperformance of Value/Cyclical over Growth.
The market rotation we saw in the month, primarily driven by short term sentiment around a successful Covid-19 vaccine, has been swift and brutal. November was textbook example of a market scenario where in our view quality stocks underperformed a rapidly rising market characterised by a rotation towards cyclical and lower quality stocks, which have been material laggards.
We are reasonably optimistic looking out to 2021, as we do see a gradual economic recovery, continued ultra-low interest rates with at least the potential for further fiscal stimulus. With improving fundamentals and plenty of liquidity it is hard to see a large amount of multiple contraction next year, but after the remarkable level of multiple expansion in 2020 (driving returns this year as EPS expectations went backwards) it is unlikely to see more expansion. Thus, EPS growth needs to do the heavy lifting and the outlook for earnings growth looks good in 2021.
The biggest question that we ask ourselves is: how long will this rotation last and how material will it be from here onwards?
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