Amid a strong rise in equity markets in November, many sectors gained sharply given the positive implications of an effective vaccine. While value sectors jumped last month, we see a greater fundamental case for certain cyclical sectors, including Industrials, Materials and Consumer Discretionary, when we look ahead to sector opportunities in the coming months, as vaccines are rolled out.
We saw a sizeable rotation in November (across equity sectors, regions and styles). The big question is, will this turn in relative performance and flows continue?
The answer is probably yes, given the game-changing announcement(s) of an effective vaccine against COVID-19. Market sentiment is now focussed on economic recovery in 2021; accordingly, the rotation could continue through December at least, as investors cover underweight areas and position for next year.
Investor activity in the last month once again showed that sectors serve as a helpful vehicle to play beta during a rapid market change. Note the significant dispersion between sector returns in November, which created a huge opportunity for sector selection, and the absolute returns. For example, there are very few country or factor indices that came close to the Energy sector’s rise. Read on for our thoughts on opportunities in cyclical versus value sectors.
What We Saw in November
All sectors rose in strong equity markets during November, but there was a sharp change in relative performance from 9 November. On that Monday morning, stock markets learned that Joe Biden had likely won the US presidency, albeit without the expected blue wave, which could have brought more progressive policies such as corporate tax rises and health care reform.
Before US markets could open to react, we had the fantastic news from Pfizer* and BioNTech* of an efficacious vaccine. There was an immediate boost to sectors that had lagged most of the rally year to date, because they were greatly impacted by COVID-19 restrictions and/or because of the market demand for growth.
Since then, Financials and Energy have been top performers worldwide (see Figure 1 below), benefiting from their value characteristics. Meanwhile, defensive sectors such as Utilities and Consumer Staples underperformed.