Vaccines and Markets – Where is the Value?
All three main pharmaceutical companies have now released their vaccine trial results, which were taken positively and have been the main driver for this month’s sector rotation. On the back of recent performance, we continue to see entry opportunities in unloved cyclical sectors including energy and travel, convertible debt and some emerging markets. Conversely, we see relatively less value across broad credit benchmarks, which have retraced to pre-Covid levels. We believe it’s time to be selective: active portfolio management will be able to add considerable value going forward.

Janet Yellen – New US Treasury Head Appointment
President-elect Joe Biden will nominate Dr. Yellen to become the next Treasury Secretary. This appointment would be a comforting voice for markets, given her vast experience at the helm of the Fed and her accommodative stance. Yellen would oversee the Treasury department at one of the toughest moments for the US economic history. We believe the Yellen-Powell duo will have the chance to make a strong case for more fiscal action in the form of a greater than expected Covid relief bill to counter the crisis, possibly also with the revamp of emergency facilities propped up by the Fed and Treasury at the start of the pandemic. Overall, with Powell and Yellen atop the Fed and Treasury, we believe financial conditions are likely to remain supportive for risk assets going forward and adding continued pressure on both the US dollar and long end government bonds as we head into 2021.

The UK – A step towards financial repression
Last week’s UK spending review delivered updated guidance on economic development and debt forecasts. In addition to the forecasted economic contraction of 11.3% this year, the UK will continue to fund their spending plans by borrowing large amounts of debt: 19% of GDP or £394bn this year alone, raising Debt/GDP to 91.9%. Generally, high government debt calls for one of two measures: either force investors to receive lower (negative) real interest on their debt or raise taxes. A step towards the former has been announced in the UK just last week, as a key reform restructures their sovereign inflation-linked debt by changing the inflation reference basket from 2030 onwards. This will significantly lower the interest payments for the government, without compensating bondholders for this disadvantage. In our view, this is a step towards financial repression and an inappropriate measure for the UK government to fund their economic pitfall.

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