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.

 US

Market optimism was boosted by President Trump signing the economic stimulus bill, all three major US stock indices closed at record highs. Although the bill was signed, US Senate Republicans blocked the other bill aimed at raising pandemic stimulus checks from US$600 to US$2,000, such that the bill is unlikely to be passed in the near future. In addition, according to the annual rotation plan of the Federal Open Market Committee (FOMC), the new four members are more dovish in their policy orientation, which means that the chances of a tightening monetary policy in 2021 will likely be lower. With the Fed's balance sheet expanding to a record high of US$7.4 trillion as a result of the ongoing quantitative easing, the market will be watching closely to see if its accommodative monetary policy will be extended in 2021. It is also worth noting that Bitcoin rose further, breaking the US$29,000 level as the US Dollar index fell below 90, spot gold prices also briefly recovered to almost $1,900 per ounce. Next week, the US will release December employment data, ISM manufacturing and service data, and the Fed will also release the December interest rate meeting minutes.

Europe

The House of Commons has approved the Brexit trade agreement, the news contributed to the positive sentiment in the European equity and FX markets. Over the past 5 days ending Wednesday, the UK, French, and German equity indexes rose 2.17% to 3.57%, while the pound has risen further to around 1.3650 against the US dollar. The trade deal was approved by the UK Parliament in just one day, ending the four-year journey of leaving the European Union. In Europe, the epidemic remains severe, with the number of daily COVID deaths in Germany surpassing 1,000 for the first time, and the mutated COVID virus strand continues to bring further uncertainty to investment markets. The Eurozone will release data on the unemployment rate in November and the Consumer Price Index in December.

China

The Hang Seng Index surged on the last day of the year and broke through the 27,000 level, the index closed 3.4% higher over the short week, but Hong Kong equities as a whole were still down 958 points, or 3.4%, throughout 2020, HSCEI was also down 3.4% over the year. China's recent economic data showed soft patches, with the official manufacturing and non-manufacturing PMIs coming in at 51.9 and 55.7 respectively in December, both down from the previous month. 10-year government bond interest rates are expected to fall for the first time in nine months, signalling a relief in funding pressures. Next week, the Caixin manufacturing and services PMIs for December will be released.

 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.

 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.