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.

US

The US stock market was closed on Thursday for Thanksgiving Day and will be closed for half-day on Friday. Over the past 5 days ending Wednesday, the three main equity indexes were up 1.47% to 2.48%. As for election matters, GSA Director Emily Murphy wrote to President-elect Biden, stating that the agency is ready to begin the formal transition process, but Trump has yet to admit defeat. It was reported that Biden will nominate former Fed Chair Janet Yellen to be the new Treasury Secretary, which may hint at a more aggressive fiscal stimulus package in the future with her dovish track record, pushing the US stock indexes to new highs. However, the COVID epidemic has yet to show any signs of slowing down, with over 60 million cases worldwide since the start of the outbreak, cases in Germany has also exceeded the one million mark. In other news, Bitcoin fell on Thursday, alongside other cryptocurrencies, and the market is watching its future trend closely. Next week, the US will be releasing job market reports and the Economic Beige Book.

EUROPE

European stock markets continued to rise on a positive global investment sentiment, the UK, French, and German equity indexes were up 0.18% to 1.29% over the past 5 days ending Thursday. The minutes of the October European Central Bank (ECB) meeting revealed that members agreed that there is a need to revisit monetary policy tools in December. In addition, ECB's chief economist also noted that there are signs of a liquidity crunch in the Eurozone. As for the UK-EU trade talks, it was reported that both sides are ready to resume face-to-face negotiations again, and the Pound continues to strengthen against the Dollar. Next week, the Eurozone will release its November Consumer Price Index and the October unemployment rate.

CHINA

Stock markets in China and Hong Kong had a fair performance this week, the CSI 300 Index was up 0.76% and the Hang Seng Index rose 1.68% for the week. Chinese economic data was favourable, with industrial profits rising 28.8% YoY in October, the largest increase in 9 years. The PBoC released its Q3 Monetary Policy Implementation Report, stating that it will implement a normal monetary policy as long as it can. In addition, Hong Kong's stock market also reacted positively following the government's policy address, with the Hang Seng Index recording a weekly gain. Next week, China will release the official manufacturing PMI and the Caixin Manufacturing PMI for November.

The US elections remain the biggest concern in the investment markets, global equity markets saw heightened volatility as the elections closed in. Capital stayed on the sidelines awaiting redeployment, resulting in the slight fall in the credit market as yields rose. However, high yields had a positive month as credit spreads narrowed with the ongoing governmental fiscal support, plus an improving operating environment as the covid epidemic is being tackled on.

In the reminder of the year, we expect fixed income to stay positive as central banks remain supportive of credit markets via (1) extended low interest rate environments, and (2) ongoing quantitative easing plans. In particular, the Bank of England increased its scale of asset purchases in its most recent interest rate meeting, while the European Central Bank mentioned that it would increase supportive measures if the current 2^nd wave epidemic continues. The US Fed didn’t offer further increases in its QE plans, but the Fed promised to extend the low interest rate environment, which also provides material support to the fixed income markets.

US elections posed as one of the largest focus in the investment market in October, as political direction uncertainties could possibly affect the growth prospects of the local market. With fundamental economic indicators staying on the weak end, including various PMIs staying in contraction zones, we find it difficult to build the case for a stronger outlook for the Japanese economy.

The newly formed Japanese government is still trying hard to find a way out for the local economy. As the ongoing covid epidemic continues its spread in the country, even though numerous policies are being considered, ranging from ease of foreign investments to insistence on holding the Olympics, we would keep our hopes for the economy low. While the Olympics could possibly help lift the limited growth, unless the global economy can fully recover to pre-covid levels in the short term, which requires fully functional covid vaccines and a well-executed deployment, we would rather remain cautious and refrain from overweighting on Japanese equities.