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    Weekly multi-asset update: January

    Weekly multi-asset update: January

    15 January 2021 Multi-asset
    Week to 15 January, 2021

    Summary

    • US fiscal and monetary policy to remain easy through to the end of the pandemic and beyond
    • Vaccination programs continue with the UK leading the way in Europe
    • Earnings season comes into focus with 43 of the S&P 500 reporting next week

    Weekly review

    US fiscal and monetary policy to remain easy through to the end of the pandemic and beyond

    This week President-elect Joe Biden put forward his stimulus proposal to the value of $1.9trn, including direct payments to individuals, aid for small businesses, state and local governments, and funding for a national vaccine rollout. The direct payments will be increased from the already approved $600 to $2000, whilst individuals are also expected to receive supplemental employment benefits and rent relief beyond the initial expiration of March. Biden promised to put forward a broader economic recovery plan in February, aimed at infrastructure spending and plans to tackle climate change. So, while Biden will try and pass this by regular order, the need to find bi-partisan support (and how much Senate time is taken up with the 2nd impeachment of President Trump) means we do not see all measures of the proposal passing - however, this would still be significant (over 5% of GDP).

    Federal Reserve Chair Jerome Powell made clear that the central bank is not yet considering an exit strategy from its current easy stance. Having tapered its asset purchasing program too quickly in the past and witnessed a negative reaction from markets with the ‘Taper Tantrum’ of 2013, Powell committed to communicate the tapering of the current programme ‘well in advance’ and said the bank would be very clear on its messaging. He also noted that the committee will not act until inflation exceeds the 2% target for a sustained period. So, with fiscal and monetary policy support looking set to continue, this provides for a constructive backdrop to risk assets.

    Vaccination programs continue with the UK leading the way in Europe

    The roll out of vaccinations continues, with Israel leading the way. In Europe, the UK has now vaccinated 5% of the population and the government is aiming to vaccinate all people over the age of 50 by the end of March, with the pace of the programme set to double from next week. Elsewhere, numbers are less promising with Italy (1.6%), Spain (1.45), Germany (1%) and France (0.5%) still lagging. With the rate of vaccinations picking up and markets looking ahead to an increase in economic activity when lockdown restrictions ease, we continue to run the portfolio with a pro-cyclical tilt.

    Earnings season comes into focus with 43 of the S&P 500 reporting next week

    The US earnings kicked off on Friday, with consensus expectations for the S&P 500 headline earnings per share at -12% year-on-year, which would represent a fall from last quarter’s growth rate of 8%. We caution that expectations have been significantly lower than final outturns over recent quarters and given an improving macro backdrop for much of Q4 we wouldn’t be surprised to see another large beat. However, with the number of companies issuing new guidance at the lowest levels in 20 years, what’s most important in our opinion is what we can glean from management commentary about current conditions and what they see for the year ahead.

    A key takeaway in Q3 was that despite one of the biggest beats on record, share price reaction to positive surprises was very muted. This is something we will be monitoring closely. It is likely that areas which have performed well in recent weeks (i.e. cyclicals and small caps) will still post significant earnings declines and thus the ability for the market to look through this will be a key focus.

    Away from earnings, both the European Central Bank and Back of Japan will deliver their latest policy decisions next week, whilst preliminary PMIs for January will also be released.

    Week to 8 January, 2021

    Summary

    • Risk assets start the year strongly with less political uncertainty in the US
    • The race to distribute and administer COVID-19 vaccines continues amid global caseloads increasing
    • Next week: virus dynamics likely to remain in focus as well as the beginning of the Q4 earnings season

    Weekly review

    Improving backdrop for risk assets

    We started the year with a further increase in our equity allocations to reflect a pro-cyclical positioning. Risk assets were on the front foot as markets look ahead to further stimulus and less political uncertainty under the new president-elect Joe Biden. Despite the violent protests that took place, Biden’s victory was officially certified and the inauguration day set for 20 January. With the Democrats winning two Senate seats in Georgia, and in control of both the House and the Senate, further stimulus expectations rose including spending and tax measures that do not contain regulatory policy, and additional benefits to help those who are struggling through the pandemic. As a result, US Treasury yields moved higher, with the 10-year edging above 1%, a level not seen since the pandemic began.

    Race to distribute vaccinations

    Away from politics, the race to distribute COVID-19 vaccinations continues as a new strain of the virus adds pressure on rising caseloads. News is generally positive with the number of vaccines being approved for use across the world steadily increasing, however the administering of vaccines is moving at a slower rate than most authorities had hoped. Whilst Israel has managed to vaccinate over 18% of its population, countries across Europe are not faring so well. The United Kingdom has administered the most in Europe with just over 2% of population now vaccinated, but its case rate is spiking sharply. Vaccination rates in Italy (0.64%), Germany (0.5%), Spain (0.44%) and France (0.07%) are lagging quite materially.

    Earnings enter the spotlight

    Against the backdrop of stricter lockdowns while countries try to speed up their vaccination programmes, the impact on economic activity and corporate earnings will once again be in focus. Companies including Blackrock, JPMorgan, Wells Fargo and Citigroup will be some of the first to release results. So, with guidance being scrutinised for the impact on business activity, other data of note will include retail sales and CPI from the US, as well as the release of the ECB’s account of its December meeting, and the Federal Reserve’s Beige Book.

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