Although the second wave of the pandemic is killing more people than the first, a series of announcements on vaccines at phase 3 test stage have boosted morale and rekindled hopes of a return to normality. Equity markets reacted by posting new highs. Covid-19 is still raging in the USA, Eastern Europe and the Middle East, but it does seem to have peaked in Western Europe. Governments worldwide are trying to balance health and the functioning of healthcare systems with the need to maintain economic activity. East and Southeast Asian countries have proved the most adept at dealing with the pandemic and their monthly death toll is lower than the daily death toll in France. Readers looking at some of the reasons for that are invited to consult our previous edition (“Life and liberty – or life versus liberty?”). This theme is not about to go away, as we are preparing ourselves for vaccines that may be an unhoped-for 95% effective and the question arises as whether vaccination should be compulsory or not. The problem will materialise once priorities have been met; requirements for vaccines for travellers, government officials and at national borders will naturally raise questions over vaccine certificates on smartphones.
Equity prices have hit new highs. The world index is now up 10.9% since the start of the year, while Wall Street is up 17% according to MSCI and 14.5% according to the S&P 500, which does not include Tesla. These gain reflect abundant liquidity and declines in interest rates into negative territory in some cases. Growth prospects are good, with the economy needing no more than to recover its pre-crisis levels. Emerging markets are up 15%, almost entirely because of China and Taiwan. China has its own Gafam-type companies, whose share prices are up between 30% and 1,243% in the case of NIO, China’s very own Tesla. China’s digital transformation continues to unsettle the Americans.
In terms of sector, the biggest winners all involve digital technology, whether it be in cyclical goods (Amazon, Tesla), IT (Microsoft, Apple) or in communication services (Facebook, Netflix, Google). In the case of Tesla, new technology is reviving sectors that would otherwise be headed for extinction. The market revered direction on all the vaccine news and cyclicals have soared since 6 November: energy is up 33% from its lows. Finance is another striking beneficiary. Investors’ hopes clearly rest on effective vaccination.
Joe Biden’s election did not undermine the rally, especially as many Republicans will have been happy to see the defeat of a disturbed and unpredictable president. Mr Biden has promised
[ trillion in infrastructure and climate spending, an increase in the corporation tax rate from 21% to 28%, higher taxes on annual incomes greater than 0,000 and a return to multilateralism.
World GDP is expected to increase 5.1% in 2021 after a 3.85% drop this year. China will be the biggest contributor to the gain; its GDP will have risen this year and is set to climb 8.1% in 2021. The pandemic was particularly damaging to the eurozone economy, which is not expected to renew with its pre-crisis levels of activity before 2022. In the USA, macroeconomic indicators such as the ISM indices show buoyant manufacturing and consumer spending has rebounded. Inflation is significantly higher in the USA than in Europe, leaving American real interest rates negative. A steeper slope to the US yield curve confirms other signs of recovery. Government deficits are still climbing rapidly and the creation of money continues apace. US corporate profits limited their losses to 17% this year and are expected to increase 24% in 2021. Wall Street’s 2021 PER is 21.9, a figure warranted by low interest rates. According to our calculations, the combination of a 67% increase in profits and the decline in interest rates over the past 10 years gives us a 179% actuarial gain in share prices, compared to the actual 189%. There is no bubble, in other words. At the same time, our risk premium model indicates a slightly overvalued S&P 500: the latest close at the time of writing was 3,630 points, compared with a theoretical objective of 3,552 points. We are maintaining our recommendation to overweight equities, which we introduced on 28 March at 2,600 points.
