Our biggest takeaway from the recent events didn’t come from central banks, but from the one-off event of Georgia runoff elections which took place in very early January. The elections ended with a complete Democrat victory, translating to a full ‘Blue Wave’. This has implications on the fixed income market, as the ever-increasing fiscal deficit will further weight on the Dollar and the long end of the yield curve, long rates could go higher, possibly hampering the performance of investment grades in turn.

Henceforth, we remain selectively positive on fixed income, prioritising quality high yield names which can benefit from the economic recovery and are lighter on duration. We are also bullish on Asian fixed income, largely based on the positive economic outlook and higher upside potential. Asian countries have a better control of the epidemic, and most forecasts have Asian economies at a better spot. Moreover, the current credit spread for Asian credit are also higher than their US or European counterparts, which should be the focus for fixed income this year.

U.S.

Headline news this week revolved around the US president Joe Biden’s inauguration on Wednesday, equities reacted positively towards the new Biden Administration. Upon taking office, Biden has signed numerous executive orders, including a return to the Paris Agreement, re-joining WHO, and policies to fight against COVID, which are signals of a return from populist politics back to traditional politics. As market participants look forward to the pending fiscal stimulus, all 3 major US equity indexes gained 0.37% - 3.06% over the past 5 days ending Thursday. The expected appointment and confirmation of former Federal Reserve chairperson Janet Yellen as the new Treasury Secretary should also be positive for the market, as the current dovish stance of the US Fed should remain unchanged, excess liquidity should still provide ample support to the equity markets. Next week, the US Fed will hold its first interest rate meeting, the US will release its 2020 Q4 GDP, and figures for Conference Board Consumer Confidence and Michigan Consumer Sentiment will be released.

Europe

Headline news this week revolved around the US president Joe Biden’s inauguration on Wednesday, equities reacted positively towards the new Biden Administration. Upon taking office, Biden has signed numerous executive orders, including a return to the Paris Agreement, re-joining WHO, and policies to fight against COVID, which are signals of a return from populist politics back to traditional politics. As market participants look forward to the pending fiscal stimulus, all 3 major US equity indexes gained 0.37% - 3.06% over the past 5 days ending Thursday. The expected appointment and confirmation of former Federal Reserve chairperson Janet Yellen as the new Treasury Secretary should also be positive for the market, as the current dovish stance of the US Fed should remain unchanged, excess liquidity should still provide ample support to the equity markets. Next week, the US Fed will hold its first interest rate meeting, the US will release its 2020 Q4 GDP, and figures for Conference Board Consumer Confidence and Michigan Consumer Sentiment will be released.

China

Hong Kong stocks had a strong week early on, but saw a slight correction on Friday. CSI 300 index was up 2.05% over the week, while the Hang Seng Index managed to hit the 30,000 mark during the week. Southbound capital continue to stay strong, which was one of the main contributors for Hong Kong’s strong equity performance over the week. Mixed news for Chinese companies came out from the US side, while it was reported that several Chinese telecom companies sought review of the NYSE delisting decision, while MSCI announced on Friday that the index company will remove CNOOC from some of its indexes, the oil producer saw a sharper fall upon the news release, which also brought Xiaomi down due similar risk. Economic figures released during the week were mixed, as fixed investment and retails sales figures fell short of market expectations. Investors could hopefully get a better grasp on the market outlook next week, as China will release industrial profit figures, and the official manufacturing and non-manufacturing PMIs by then.

The never-ending COVID epidemic has once again reared its ugly head in the country, with infection figures hitting fresh record highs. The government have declared the state of emergency for the Tokyo area, and is considering expanding the coverage. The state of emergency this time around has been more restrictive, as there has been limitations on holding events and early closures of restaurants and bars, which would likely negatively impact the economy that has yet to fully recover.

This brings us to the second point, where the largest stimulus in form of Olympics Games is potentially in jeopardy. With the epidemic situation remaining relatively severe, recent surveys showed a majority of respondents favouring a further delay or cancellation altogether, contrary to the Japanese government’s determination of hosting the Games ‘at any cost’. We remain sceptical of a complete vaccination complete by 2021 Q2, which would limit the actual economic benefits generated, the prolonged limitations on travel would create further pressure on baseline scenario in Japan. Henceforth, our stance remains opposed to overweighting Japanese equities in the New Year.

Daily cases in emerging markets economies remain at roughly the same level as it was, while some countries saw daily cases climb, key economies such as India have the pandemic under relative control. With the vaccinations rollouts ramping up along with the production, the outlook for the global economy is bright. As emerging markets tend to thrive in cyclical upswing environments, the year of recovery should be rather favourable year for the market.

We are further convinced that emerging markets will perform with the backdrop of a weak dollar. As the Dollar has become a less attractive currency due to the low interest rate and increased supply from the quantitative easing programmes, there has been downward pressure on the greenback since mid-2020, this is expected to further worsen with the widening fiscal deficit arising from the stimulus bills, which is expected to weigh down on the dollar. Historically, a weak dollar favours emerging market equities, and this is expected to stay true for the year to come. Hence, we will remain positive on emerging markets, in particular Asian markets for their better resilience and stronger upside.

The epidemic situation remains severe, as the mutated strain of COVID continued its spread across the continent with its high infectiousness. Numerous countries extended their lockdown measures, which is expected to result in a softer Q4 economic growth. This could have potentially lasting impacts on the economy, as businesses had to rely on cheap credit and governmental aid to survive through the economic downturn, which could potentially give rise to another wave of ‘zombie companies’, creating another ticking time bomb for the region already struggling to find growth.

Brexit creates another point of concern. Although most of its former uncertainties have dissipated with the signage of the Brexit trade deal, Brexit’s disruption to the economy and business environment should not be underestimated. Retailers are halting cross-border businesses awaiting further clarification, logistics also face more complex border clearance rules, which will likely hinder regional economic growth in the mid to long run. Overall, as the sub-50 service PMIs across the region suggests, the current business environment is still far from optimal, the European economy remains under pressure. With the current outlook less favourable, we would refrain from overweighting European equities.

Looking ahead in the New Year, Chinese equity markets remains on our radar as one of the markets with great growth potential. Fundamentals stayed strong throughout the second half of 2020, with most indicators staying on the uptrend in consecutive months, the overall economic growth in 2020 is expected to stay positive, and should see faster than trend growth in 2021. Although we expect both fiscal and monetary policies in China to stay modest, ruling out large increases in stimuli and possibilities of rate or RRR cuts, we also do not expect significant tightening on both ends.

With modest policy support expected, picking sectors that better fit into the China’s mid to long-term development direction would likely yield better results. Ones such as consumption related sectors, or tech & innovation related ones, should see better long term growth prospects. As the development direction should bring additional capital flows, this to a certain extent justifies their current valuation. Henceforth, positioning ourselves in these sectors should get us a better risk-adjusted return in the longer investment horizon.

On the epidemic front, situation remains troubling. Daily infection figures in numerous states continued to climb, lockdown measures remained in place in most locations throughout the traditional high season of Christmas and New Year, which is expected to put businesses in a tight spot heading into the New Year. Fundamentals showed weakness, as jobless claims stay on the higher end and services PMIs ended its uptrend, yet market have looked past economic figures in the short term, with eyes on the way out for the COVID crisis.

According to government estimates, the country should be able to rollout the majority of the vaccinations by summer, which could imply a complete recovery by end of 2021 Q2. Together with further stimulus plans, this should provide sufficient basis for a positive year. Sectors that are set to gain from the administration change, such as companies involved in innovation and sustainability, should see even better returns. As valuations were on the expensive side at year end, the market could go lower early on, then rebound as corporate earnings recover.

U.S.

US stocks have not seen major movements over the past week, the three major equity indices ranged from -0.16% to +0.35% over the past five days ending Thursday. The news that caught the market's attention was the impeachment against Trump, which was reportedly supported by Senate Republican Leader Mitch McConnell. If the motion proceeds to the Senate, it would be the first time in history that an impeachment trial would extend beyond the presidency. In other news, US President-elect Joe Biden unveiled a US$1.9 trillion economic relief package, which should be followed by a package focusing on longer-term goals such as infrastructure and climate change. On the monetary policy front, Fed Chairman Jerome Powell said it is not time for an exit from easing, adding that interest rates will remain low for a longer period; the news put pressure on the US dollar. Next week, the US will release the Markit manufacturing and services figures for January.

Europe

European stocks were on a weak trend, with the UK, France, and Germany posting losses between 0.43% - 1.04% over the past 5 days ending Thursday. The epidemic remains serious in Europe, with Germany's total cases topping 2 million as of Thursday. Chancellor Angela Merkel wants to tighten measures to fight the epidemic, but German companies are closing down due to the epidemic, the country's economy has shrunk by 5% YoY in 2020. The minutes of last month's European Central Bank (ECB) interest rate meeting showed that members were divided over the monetary policy direction, and the market was wondering if the ECB would be able to implement an effective long term policy. On the other hand, Italy faces another political crisis, as former Prime Minister Renzi's withdrawal from the ruling coalition rattled the market and put the ruling coalition at risk of collapse. Next week, the ECB will hold its interest rate meeting, while the Eurozone will release its manufacturing PMI and ZEW economic forecast data.

China

Hong Kong stocks had a strong week, with the Hang Seng Index rising 2.5% over the period and 4.93% year-to-date. As for the China A-share market, the CSI 300 Index fell slightly by 0.68% over the week, but still managed to maintain a year-to-date gain of 4.74%.  The US Department of Defence added 9 more Chinese companies to the list of military-related companies. Xiaomi, one of the companies on the list, saw its share price plunge by over 10% in a single day, while Alibaba and Tencent, both of which suffered from rumours earlier, managed to get away and rebounded. China's economic data showed improvement, with the PPI slowing in December and the CPI reversing the contraction seen last month. Next week, China is set to release its Q4 GDP and December's fixed investment, manufacturing and retail data.

 US

2021 started off with a bang as the relatively wild week comes to an end. Over the week, the Georgia Senate runoff elections and subsequent events at the Capitol Hill hit the headlines across the globe. Democrats surprisingly won both Senate seats in the Georgia runoff race despite the close race, cementing a full control over all 3 branches of power. Markets however reacted positively towards the resultant ‘Blue Wave’ in anticipation of more fiscal stimulus on the way, all 3 major equity indexes hit new record highs and were up 1.27 – 1.42% year-to-date ending Thursday. Another notable event in the week took place in the Capitol Hill, where the certification of Electoral College voting results were briefly interrupted as protestors stormed in. After the situation calmed down, the Congress resumed and confirmed Joe Biden win, who will take office on 20 January. As for fundamentals, ADP nonfarm employment figures were disappointing as it went negative once again, other PMI figures however remained in the expansion zone, reflecting the positive overall business sentiment and participants look forward to the post-vaccination era. Next week, the US will release CPI, retail sales, and Michigan Consumer Sentiment figures.

Europe

COVID remains one of the key issues in 2021, WHO warned that the continent is at tipping point as cases surge, the organisation urged countries to adopt stricter measures to curb the spread. Vaccination programmes are carried out throughout Europe, which is hopefully enough to bring the infection rate as population immunity builds. European equities had a modest start with the UK, French, and German equity indexes gaining 1.82 – 6.14% since the start of 2021. Setting the pandemic aside, Brexit was also another point of concern, as retailers and customers get the first taste of a reenacted border, complicating VAT rules also posted as surprises to both sides, numerous companies have decided to halt international deliveries for the time being to avoid overcharging their customers. As for economic fundamentals, most CPIs and PMIs fell below market expectations, highlighting the impacts of the ongoing pandemic and lockdown. Next week, we will get more data on industrial production in the Eurozone and the UK, and also the preliminary GDP figures in the UK and Germany.

China

Entering the New Year, both Hong Kong and Chinese equities continued to edge higher. As of Friday, the Hang Seng Index rose 2.38% year-to-date and the Hang Seng Technology Index rose 2.43%, China A-shares saw larger gains, with the CSI 300 Index 5.45% higher. Earlier, US President Donald Trump signed an executive order banning US transactions with eight Chinese apps, including Alipay and WeChat Pay, which weighed on the performance of some Hong Kong-listed technology leaders, such as Alibaba, which is still down year-to-date. On the other hand, the New York Stock Exchange reversed its decision to delist three major Chinese telecoms companies, sending the shares down again. As for economic data, China will release the CPI and import/export data for December next week.