November 2020 / INVESTMENT INSIGHTS
Global Asset Allocation: November Insights
Discover the latest global market themes
MARKET INSIGHTS
AS OF 31 OCTOBER 2020
Blue Ripple?
A Biden presidency, with Republicans maintaining control of the Senate, is a possible outcome of the US elections. Most polls heading into the election were predicting the possibility of a ‘Blue Wave’, leading to a Democratic president, Senate and House that could have resulted in higher levels of fiscal spending countered by the potential for policies of higher taxes. Markets appeared to be celebrating the potential for a divided government, tempering the chances for more aggressive policies by either party and hopefully leading to an environment of more compromise. One area that may come into focus is regulation, with a spotlight on the technology sector, as there appears to be bi-partisan support for such measures. If the increasingly likely outcome of a divided government holds, a more balanced political environment could potentially lead to reduced market volatility and a more supportive backdrop for risk assets.
Insurance Cancelled
Heading into the election, US Treasury yields remained range-bound to slightly higher despite bouts of increased volatility and stocks selling off. While stock and bond correlations move around over time, their prices historically have been negatively correlated during periods of market stress where risk assets sell off with investors fleeing to the safety of US Treasuries. As volatility picked up, investors took notice as this reliable insurance policy did not respond. It appeared stocks were reacting to short-term risks of an unsettled, chaotic election, while bonds looked through to the potential for fiscal spending that could move yields higher. With yields hovering at record‑low levels, investors may not be getting compensated for the increased duration risk if rates were to revert higher. While investors may be rethinking how to hedge against their equity exposures, US Treasuries still provide ballast even if their positive appreciation may be tempered at current levels, and importantly provide liquidity when it is at a premium.
There's No Place Like Housing
Amid the upheaval brought on by the coronavirus pandemic, real estate markets across the board have been impacted on an unprecedented scale. On one hand, the residential housing market continues to boom, spurred on by low rates and a resilient consumer. Many homebuyers are fleeing big cities for more space, as several major companies have extended work from home provisions. However, in stark contrast, commercial real estate, particularly retail, office space and hotels, have continued to face headwinds. Trends that began to take hold pre-coronavirus, such as moves towards online versus brick-and-mortar retail, have been further perpetuated by the pandemic. Similarly, demand for office space could be impaired going forward as working from home trends may become more permanent. If these trends persist, areas of the market exposed to commercial real estate, such as office and retail real estate investment trusts (REITs) will remain challenged.
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November 2020 / MARKETS & ECONOMY
Yoram Lustig is the head of Multi-Asset Solutions, EMEA and Latin America, in the Multi-Asset Division. He also is a portfolio manager and the chair of the UK and European Investment Committees.