18.11.2020 10:18

Market Outlook: Vaccine hopes are boosting equities

We have recently seen an increase in risk appetite and a clear rotation towards lower-valued companies, as well as stronger economic conditions and somewhat higher government bond yields. The rotation from high-priced technology stocks to value stocks continued early this week after encouraging COVID-19 vaccine news and hopes of a faster economic recovery.

Further positive news about vaccines

On November 16 another vaccine producer, Moderna, announced that it has succeeded in developing a highly effective COVID-19 vaccine – even more effective than the vaccine testing results that Pfizer had announced on November 9. The news from Moderna again lifted stock markets.

Continued need for fiscal stimulus

Of course it is hugely encouraging that we may have vaccines available soon but before that, further stimulus measures will be needed. Although we are seeing some favourable signals regarding the spread of the coronavirus in Europe, the situation continues to worsen in the United States.

Recent vaccine progress and an unexpectedly strong US labour market have not decreased the need for new American fiscal stimulus. Political deadlocks are currently preventing enactment of a functioning national strategy, but states and local jurisdictions are announcing new pandemic-related restrictions – including in Republican strongholds.

Fiscal stimulus measures will be needed to help households and small businesses manage until the arrival of vaccines changes the US economic situation. One of the most critical measures would be to extend federal unemployment benefits that are due to expire at the end of 2020. SEB's main scenario is that the US Congress will manage to agree on a scaled-down stimulus package of around USD 1 trillion. But if such a bill is approved before year-end, it will have to be signed by President Donald Trump, who is currently focusing his attention mainly on legal actions related to the November 3 election.

We continue to expect new actions by Sweden's Riksbank (expanded quantitative easing), the European Central Bank (expanded QE) and the US Federal Reserve (extended duration of QE) at their upcoming monetary policy meetings.

Hungary and Poland have vetoed EU budget

On November 16 both Hungary and Poland vetoed the European Union's seven-year budget and coronavirus recovery fund if payments are conditional on recipients meeting rule-of-law requirements. The issue will now be debated by EU ministers and leaders. There is a risk that a decision on these financial safety nets will be delayed, threatening the union's ability to take joint steps to manage the economic impact of the pandemic.

Trump's final weeks as president

Donald Trump's final period in power looks set to include attempts to push through a number of election promises before his term ends on January 20. The White House recently invited oil companies to identify conceivable sites for oil drilling in previously protected areas of the Arctic, with the intention of selling licences early next year. Trump is also expected to approve partial US troop withdrawals from Afghanistan and possibly Iraq.

Brexit decisions may be delayed until last minute

The lack of success in negotiations between the United Kingdom and the EU on a post-Brexit trade agreement may cause a delay in the planned vote in the European Parliament on December 16, given the Parliament's insistence on at least six weeks to review the outcome of the negotiations. According to The Guardian newspaper, there are now discussions about holding an extraordinary parliamentary session on December 28, only days before the UK-EU agreement would go into effect. The required parliamentary lead time still means that the negotiations must be completed within the next 5-10 days.

Sweden's prime minister pulls emergency brake

Stefan Löfven's announcement on November 16 that a maximum of eight people will be allowed at public gatherings until at least Christmas means that Sweden is now imposing its most far-reaching restrictions to date – another blow to already hard-pressed companies in the entertainment and sports sectors. Meanwhile the government said that its pandemic relief measures for affected companies would probably have to be increased.

Record-sized free trade agreement in Asia

On November 15, leaders of 15 Asian-Pacific countries (the Regional Comprehensive Economic Partnership, RCEP) approved one of the world's biggest-ever free trade agreements. The 15 countries − consisting of the 10 members of the Association of Southeast Asian Nations (ASEAN) plus Japan, China, South Korea, Australia and New Zealand – account for some 30 per cent of world population and roughly the same percentage of the global economy. The RCEP agreement risks further weakening US influence in the region, a trend that was accelerated by President Trump's 2017 withdrawal of the US from the Trans-Pacific Partnership (TPP), which his predecessor Barack Obama had helped negotiate. The RCEP agreement does not cover all trade but is still a major step towards reducing tariffs and establishing common trade rules. It will now be ratified by the signatory countries and will take some time to be implemented, but the new agreement shows that globalisation will continue with or without the US.

EUR 1 trillion for green investments in Europe

Last week European governments approved a plan for the European Investment Bank (EIB) to adopt and set in motion a programme to fund EUR 1 trillion worth of green investments and sustainability projects. The programme will run until 2030.

Our market view

Equity valuations are high from a historical perspective, making the market more sensitive to negative news. But there are good long-term arguments for accepting higher valuations, especially low interest rates and yields along with major stimulus packages, which suggest continued good growth. In recent weeks, markets have been driven higher by the US election outcome and perhaps above all by hopes and encouraging news about the development of COVID-19 vaccines. The upturn doubtless increases the risk of short-term reversals in case of negative developments.

Worrisome signals about virus transmission and the risk of further pandemic-related lockdowns are probably the biggest threat to financial markets at present. The restrictions that have already been imposed probably mean that economic growth and corporate earnings forecasts, which have been adjusted upward in recent months, may need to be lowered for the fourth quarter of 2020. As long as the spread of COVID-19 accelerates, new lockdowns will be a major source of concern.

The general picture after third quarter 2020 corporate reports is that earnings have provided upside surprises, but strong reports have not been fully rewarded with rising share prices − a confirmation of our view that the upturn since stock markets bottomed out last spring implies that investors are already counting on positive performance ahead, as reflected by valuations. We do not regard today's valuation levels as alarmingly high, although they imply some limitations on potential returns.

Given the encouraging overall economic outlook we are sticking to our recommendation of an overweight in equities and other risk assets, despite short-term sources of concern.