US

Just as the first vaccines started to be administered around the world, the discovery of a second, more contagious strain of the virus in the UK triggered panic in the markets, with many European countries cutting off traffic to and from the UK. Nonetheless, as the year draws to a close and the festive mood kicks in, trading has tapered off and market volatility has been somewhat muted. The three major US stock indices ranged from -0.08% to 0.89% over the past 5 days ending Wednesday. The US Congress passed a US$900 billion stimulus bill, but President Donald Trump declined to sign off, stating that the direct payouts were too small. He also vetoed the $740 billion National Defence Authorisation Act, claiming the bill failed to include critical national security measures. House Speaker Nancy Pelosi plans to vote on the $2,000 personal aid cheque proposed by Trump, and called for bipartisan support. On the economic front, the US consumer confidence index unexpectedly fell to a four-month low in December, reflecting continued concerns about the economic outlook. Next week, the US will release the National Home Price Index in December.

Europe

The UK saw a record number of new COVID cases and also discovered a new COVID strain from South Africa, which officials say may be more contagious. As the mutated virus strain in the UK may have already spread to Germany, France, and Switzerland, concerns about the European economic recovery slowing down have increased. European stock markets, led by the UK, came under pressure, with the FTSE 100 index falling by 1.14% over the past 5 days ending Wednesday. On the other hand, the Pound surged in response to reports of a new proposal on the fisheries issue, where the UK and EU could potentially agree on a Brexit trade deal framework, the Pound recovered to 1.355 against the US Dollar. The market is watching the development of the epidemic in Europe and the progress of the negotiations between the UK and the EU closely.

China

The Hang Seng Index was down 0.42% for the week, as Hong Kong market is closed on Friday following a half-day market on Thursday due to Christmas. It was reported that Alibaba is under investigation by the mainland regulators and that its Ant Group had received a notice of inquiry, weighing on the performance of the e-commerce and Internet-related sectors, the Hang Seng Technology Index in particular fell sharply by 1.35%. Mainland stocks fared better in the short week, as the CSI 300 Index rose slightly by 0.14%. The World Bank remains bullish on China's economic performance next year, with a growth forecast of 7.9%. Next week, China will release data on industrial profits for November and the official manufacturing index for December.

The rally over the month was led by lagging cyclical sectors, which have been underperforming the market since COVID hit. With the vaccine seen as a magical solution to the return to normal, relevant sectors surged given that production and consumption is expected to be on the rise. The vaccines should also provide a better case for holding the delayed Olympic Games in 2021, which could provide the much-needed boost to the struggling economy.

However, we remain sceptical that the economy will recover to the level that justifies the market rally, as the issues contributing to the weak fundamentals have not dissipated. Moreover, questions remain over the economic benefits holding the Olympic Games, as travel restrictions are not likely to be fully lifted by mid-2021. The vaccines production timeline will likely only meet the world’s population by 2022. With the valuation levels elevated, the upside is relatively limited in the short term, we would still advise against overweighting Japanese equities considering the comparatively larger downside.

 US

US equity markets continue to edge higher over the week, largely on the back of vaccine optimism and anticipation of economic recovery, despite disappointing recent economic figures. Over the past 5 days ending Thursday, all 3 major equity indexes gained 1.01-2.89%. The Moderna COVID vaccine is given the green light by the FDA advisory panel, hopefully following footsteps of the BioNTech-Pfizer vaccine in getting nationwide approval for deployment, which should provide a stronger case for an earlier recovery. On the monetary front, the Fed made no changes to the existing monetary policies, Fed chairman Jerome Powell mentioned that the Fed expects a faster than expected growth in 2021, and a lower unemployment rate. Economic figures on the other hand remain disappointing, retails sales went negative MoM ahead of the holiday season, initial jobless claims climbed higher, and the Philadelphia Fed Manufacturing Index in December turned out to be far lower than the market consensus. However, markets and businesses remain hopeful on the vaccine induced recovery, as indicated by the higher manufacturing and services PMI. Next week, we will see a shorter trading week due to Christmas, but GDP figures for Q3, Michigan consumer sentiment and core durable goods orders can shed light on status on the economy.

Europe

Vaccine news continue to contribute to the positive market sentiment, the UK, French, and German stock markets continued to edge up over the past 5 days ending Thursday, logging in gains of 0.07-4.22%. Epidemic news continue to take the centre stage, with French president Emmanuel Macron tested positive for COVID, forcing quarantines for numerous European politicians. Epidemic remains serious in Europe, and the German government has already announced a stricter lockdown that stretches over New Year, which is expected to dampen business sentiment in the traditional high season. As for Brexit matters, trade talk deadlines have extended until the end of the year, but UK Prime Minister Boris Johnson noted that there is a high possibility for a no deal Brexit by the end of the year. For economic indicators, Eurozone had good numbers, with various PMIs exceeding market expectations. Next week, the Eurozone will publish more figures on business sentiment and consumer confidence.

China

China A-shares improved, with the CSI 300 Index rising 2.26% for the week, while Hong Kong stocks did not see much movement over the same period. Industrial production rose at a slightly faster pace to 7% YoY in November, while retail sales rose 5% YoY over the same period, up from 4.3% in the previous month, and fixed investment rose 2.6% YoY over the same period, up from 1.8% YoY last month. The market will focus on the key policies mentioned at the Central Economic Work Conference.

The largest moves in the market came from high yields. Anticipating a full recovery in the economy early on next year, credit spreads of high yields narrowed over the month, as a stronger economy reduces the risk of default among high yield issuers. The anticipated extended fiscal support from global governments also serves to support the businesses through the hard times ahead.  Apart from improving fundamentals, global monetary policy staying loose also helps support bond prices in the mid to long-term.

As for the outlook, we remain positive on fixed income overall as downside is limited with the ongoing support from quantitative easing and prolonged low interest rates across major central banks. We continue to rate high yields higher due their more favourable risk-to-return payoff, valuing Asian high yield names more due to 1) stronger economic fundamentals, and 2) higher risk premiums for the same level of credit risk. Quality remains the key focus when considering high yields, we would favour issuers with stronger balance sheets and operational cash flow, and avoid ones that require additional governmental support to stay afloat.

Although daily COVID cases in certain countries remain elevated, markets have already looked past the current situation and decided to price in a longer-term performance. In particular, some of the more prominent equity laggards such ASEAN markets, Russia, and Brazil saw double digit gains in the month. The gains were largely fuelled by the market’s shift to cyclicals and value stocks as optimism runs high, this is accompanied by the Biden victory in the US elections, hinting at policy direction reverting back to the pre-Trump era, which would likely favour emerging markets in terms of political risk.

With the economy entering a faster rebound starting from 2021 onwards, structural growth in EM should likely outpace developed markets. The recent fundamental economic indicators also reflect the recovery in emerging markets, as leading indicators remain in the expansionary zone. Although the market remains at risk of a short-term correction due to the rapid surge in the indexes, we should reasonably expect EM equities to perform in 2021 with the improved base scenario.

Freshly imposed lockdown measures did manage to taper off the peak in daily infection figures for the adopting countries, but ones without still see their figures setting new highs by the day. The impact is evident in the weaker economic fundamentals, as the Eurozone services PMI continue to slide, marking the third consecutive month in the contraction zone. Unless the epidemic situation miraculously improves in the short term, the early rebound could be considered a kneejerk reaction to the recent positive news.

Which brings us to the key factor in the equity surge over the month – COVID vaccines. The market seems to be setting their sights on a return to normal by 1H 2021. However, global vaccine production would likely only meet the global population by 2022, which could delay the actual reopening. We believe that the idea of a ‘K-shaped’ recovery still holds true, certain sectors such as oil & gas and financials, should see limited improvement even if the economy recovers due to structural reasons. Thus, selection remains the key, investors should continue to focus on themes and sectors with better growth prospect in the mid to long-term.

Just comparing the 2 largest economic superpowers now and we can notice that the Chinese economy is doing much better than the American one, as indicated by the low but positive growth in 2020, and a much higher growth expectation in 2021. Economic fundamentals remain strong, high frequency data including various PMIs, industrial production, and exports alike continue to show expansion YoY, which underpins the strength and resilience of the Chinese economy. As the macro factors do favour emerging markets in the short to mid-term, this forms our base for a better expectation of the Chinese equity performance outlook.

In particular, certain trends are expected to produce outperformance in the short to mid-term. As the Chinese investment market is heavily affected by governmental policy direction, industries promoted by the government as a strategic focus under the ‘dual circulations’, such as semiconductors and other disruptive technologies, or sectors that are the key to China’s migration to an advanced economy, such as e-commerce and other consumption related sectors, may see excess growth and increased capital inflows over the next few years, these should be the focus in the portfolio for the coming year.

Biden is essentially announced the winner of the election, Trump has also announced the official commencement of the transition procedure, signalling an end to the whole post-election fiasco. While the Democrats have control over both the Presidency and House of Representatives, if the Republicans win at least one of the seats in the Georgia Senate run-off, they will maintain control over the Senate. This would likely block the more radical policies from the Biden administration, which should be positive for the overall market.

Moving on, the focus is gradually shifted back to the economy, market sees improvement in the outlook with a number of vaccine leads showing breakthrough. However, questions still remain regarding potential mid to long-term side effects, the actual rate of production, and potential resistance from the anti-vax community, these could pose as obstacles to a speedy full reopen. With the current valuations at a higher level, investors should stay cautious and selective, choosing quality names that doesn’t only focus on the impulse of economic reopen, but rather has a larger growth potential.

US

The US Food and Drug Administration (FDA) said the Pfizer COVID vaccine is safe and effective, but on the other hand, the US fiscal stimulus package remains in a standstill, with US stocks trading in a narrow range close to historic highs for now. The three major US stock indexes saw minimal movement over the past five days ending Thursday, but the tech giants' performance was hampered by news of the anti-trust lawsuit against Facebook. On the fiscal front, US Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi both said progress was made, but a few key issues remain and are currently going nowhere.  The COVID epidemic continues to ravage across the country, the US saw its daily COVID deaths exceed 3,000 for the first time, whereas the advisory panel to the FDA recently endorsed the Pfizer vaccine based on clinical trials results, which would suggest a likely green light for emergency use authorization. However, recent data shows that the US economy is not performing as well as expected with the recent number of initial jobless claims unexpectedly surging to the highest level since September. In addition, the US Consumer Price Index rose 1.2% YoY in November, slightly surpassing market expectations. Next week, the US Federal Reserve will be in the spotlight as it meets to discuss about the economy and monetary policy outlook for the coming year, the US will also release data on retail sales and manufacturing PMI.

Europe

The European Central Bank's (ECB) announcement to raise the cap and extend the Pandemic Emergency Purchase Programme (PEPP) seems to be ineffective in boosting market sentiment, with the UK, French, and German stock markets lacking momentum over the past 5 days ending Thursday. The ECB kept policy rates unchanged, but increased the size of PEPP by 500 billion Euros and extended it for another nine months. ECB President Christine Lagarde said the second wave of the epidemic could cause the economy to contract sharply in the fourth quarter, so the growth forecast for 2021 was lowered. Brexit talks remain rugged and tortuous, with both sides agreeing to extend the deadline until Sunday, but UK Prime Minister Boris Johnson warned the market to be prepared for a no-deal Brexit, raising fears of more uncertainties in the negotiations, the Pound softened against both the Euro and the US Dollar. Next week, the Eurozone and the UK will release their consumer price index figures.

China

Some of the international Indices were requested by the US government to exclude certain Chinese companies, weighing on individual stock prices and the general market sentiment. China A-shares and Hong Kong stocks softened this week, with the CSI 300 index down 3.48% and the Hang Seng index down 1.23%. China recently released a number of economic data, exports in USD terms rose 21.1% YoY in November, which is the biggest increase since February 2018, while China's CPI fell 0.5% YoY in November, which is the first time CPI went negative since October 2009. Next week, China will release November fixed investment figures, industrial production, and retail sales data.

US

A U.S. Senate panel proposed a $908 billion economic stimulus package, which was subsequently supported by Democrats. The news pushed U.S. stocks higher, but Thursday's report that Pfizer's vaccine production fell short of expectations dragged the stock market down slightly from the highs, but the three indices still recorded a cumulative gain of 0.32% to 2.34% in the five days ending Thursday. Biden is reportedly assembling a new team, and said he has already decided on a number of economic department candidates, including former Federal Reserve Board Chair Yellen as Treasury Secretary, and Brian Deese, a BlackRock executive and former economic advisor to President Obama, to lead the National Economic Council. On the neo-crowning front, the number of new daily confirmed cases worldwide surpassed 700,000 and reached a record high, while Pfizer said it had lowered its earlier vaccine production target by half. In terms of data, the ISM manufacturing and services indices for November were both lower than the previous month, indicating that the pace of economic recovery is slowing. The U.S. will release the Consumer Price Index for November and the University of Michigan Market Sentiment Index for December.

EUROPE

The UK's approval of Pfizer's new coronary vaccine, coupled with the positive news of the Brexit trade negotiations, pushed the UK stock market and the British pound both higher, the UK FTSE 100 index rose 2.0% in the five days ending on Thursday, the French CAC index and Germany's DAX index were both up and down; the pound against the dollar was high at the 1.3500 level, a new one-year high. It is reported that the EU's chief Brexit negotiator Barnier will return to Brussels on Friday, the market is expected to Brexit negotiations may be close to completion, at the same time, the European Commission President also expects Brexit trade negotiations or within a few days to achieve positive results. The European Central Bank (ECB) will hold an interest rate meeting, where markets are expected to expand asset purchases.

CHINA

The stock markets in China and Hong Kong developed separately, with the CSI 300 Index up 1.71% and the Hang Seng Index down slightly. The HKMA spokesperson said that the HKMA is working with the PBoC on a framework study on the implementation of the "Southbound Bonds Connect" after the "Northbound Connect". It is also reported that the PBoC will assess systemically important banks annually from next year to reduce the likelihood of significant risks. China will release its consumer price index for November and trade balance data for November.