Following Pfizer’s news on their 90% effective vaccine, Moderna also announced its COVID-19 vaccine was 94.5% effective in a preliminary analysis. With large-scale production and additional vaccines likely, an end to the global pandemic is expected to be around mid-year, with a sharp broadening out of the world economic recovery in the second half of 2021. Pent-up demand, ultra-easy monetary policy and stimulus could mean a strong, synchronous global recovery through 2022.
The vaccine news has boosted confidence in Citi’s base-case views. Owing to massive dispersion between the performance of many “COVID-19 cyclicals” and “COVID-19 defensives” this year, there could be room for a substantial further performance rotation in the coming year, even if it is only to partially reverse 2020’s impact.
The Citi Private Bank Global Investment Committee (GIC) further increased overweights to global equities, adding to developed markets (ex US) and emerging markets (ex China).
- The added allocations to Asia, Japan, Europe and Latin American equities reflect a sharp rebound already underway in global trade.
- International trade discord seems far less likely with a Biden-led US administration and markets may benefit from the end of trade restraints that preceded COVID-19.
- Emerging markets (EM) equities could also benefit from sharply compressed US interest rates and trend declines in the US dollar, given that the Federal Reserve has adopted a higher inflation target.
- While Chinese equities gained sharply in 2020, EM equity valuations overall are near a record 35% discount to US equities on prospective 2021 earnings per share.
- Finally on Technology, Citi analysts do not expect a fundamental sector collapse. However, the very strong performance of large cap IT shares – with the Nasdaq 100 Index up 38% in 2020 (as of 16 November)– suggests modest near-term return. Software, applications, and digital content continue to gain share of the world economy over time. Certain tech firms saw demand for their services boom as a solution to social-distancing requirements. However, a normalization of demand for these services with the likely end of the pandemic next year could be a performance restraint.
To fund the change, the GIC reduced overweights in EM fixed income and US high yield debt. They also reduced short-term US Treasury holdings with near zero yields.
- While EM and US high yield debt could be further supported by recovery from the COVID-19 shock, declines in yields are now pronounced.
- With very low volatility and a mere 20 basis point annual yield, US Treasuries simply represent cash-equivalent assets on the sidelines.