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"There are two ways of spreading light: to be the candle or the mirror that reflects it"

- Edith Wharton

Markets are, in some ways, strangely quiet. We have discussed our views over recent weeks that the major macroeconomic and geopolitical uncertainties that have dominated for most of the Autumn {The US Presidential election, Brexit, fiscal stimulus (US and Europe) and of course the Coronavirus} are in the process of resolution, or at least as far as expectations are concerned, we have reached a point at which risk markets can dare to focus on the future beyond these uncertainties. However, in the near term, the hurrah of vaccine results (of incredible efficacy - given our recollection of a number of commentators/experts suggesting we may never find a vaccine), the boost of - admittedly still contested - US election results that provide arguably the most risk positive backdrop for global risk assets (a President with a more multilateral, cooperative approach to trade and a more liberal approach to spending, without Senate backing for higher taxes and tighter regulations), and even the relief of suggestions that the end of the (very long, and at times very dark) tunnel of Brexit negotiations is approaching… have resulted in somewhat disappointing price action for risk assets.

Has this disappointing market reaction function led us to re-evaluate our risk positive view of the world as we move towards 2021? In short, no. In fact, far from it. While the recent acceleration of the spread of virus cases across the globe (in waves of varying speed) has led to stricter measures and by implication impending periods of muted economic growth, it is clear that the reaction function of markets to these potential negative economic implications has significantly diminished - recent shutdowns across Europe and the US have had negligible impact on global risk assets. In part, at least, this is because there are fewer known-unknowns this time around, and the vaccine progress reduces the potential duration of future virus-related economic contraction.

Indeed, I have heard arguments from various commentators that, given the news on the vaccines, the modest (or even negative) response from forward-looking indicators such as US 5y5y forward inflation swaps or the 2s10s US curve spread argues that positive expectations are already priced by markets. Personally, I would look at these factors from the opposite direction. Given the fact that the UK, parts of the US and much of Europe is currently locked down, and US stocks are at or very near all-time highs (as we discuss below, we prefer to look at the equity space through the narrow lens of US tech stocks - at least for now), I am more in the camp that markets are, on aggregate, underweight risk assets. Furthermore, following the very weak earnings performance from equities and the economy in general in 2020, it is likely that the equity market displays early cycle characteristics in 2021 - strong earnings growth, strong returns. On that basis, the forward-looking indicators are more likely to be underpricing the potential reflation trade in 2021.

From a market perspective, we feel that there is even further reason to look beyond the near-term negative of virus resurgence. Firstly, it has been clear throughout the economic and social distortions of 2020 that there has been an acceleration in the adoption and progression of tech. Whether this is in biotechnology, green energy technologies (as has been notably highlighted by the UK this week), AI, robotics or any number of more mainstream applications, this is, in our view, likely to continue to be the near-term driver of global economic growth - and by extension, the likely driver of economic differentiation going forward. In light of our continued positive view of risk assets in 2021, tech-driven equities and those countries with dominance (most notably the US and China) stand out as investment destinations of choice.

Lastly, against a wall of commentator pessimism, we remain optimistic about the UK – not due to the fact that the current suggestion is that we face the prospect of five additional days lockdown in lieu of every day of Christmas freedom - though this does sound a mildly more attractive lending proposition than Greek 2 year paper at -11bps! Rather, that the conclusion of a Brexit deal, as we expect to be the case (but even in many respects in the case of no deal), marks the conclusion of a period of intense uncertainty, exacerbated by a global pandemic, whereby the UK has a greater regulatory, and legislative scope [emphasis intended!] to chart a new path in the global economy. This week’s 10-point Green Deal is a case in point. On one hand, it puts to rest the fear of the EU that the UK has aspirations for weaker environmental protections. But from our perspective, the Green Deal is more about the economic prize of a global lead (or at least a significant contribution to the global advancement) of green technologies than the environmental prize of a healthier planet - though in this instance, the result is one and the same. I for one remain optimistic, and am happy to give the UK the benefit of the doubt… While commentators continue to view the UK’s glass as half empty, the reset of Brexit offers a once in a lifetime opportunity to top it up.


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Views accurate as at the time of publication. Opinions expressed by the authors are their own and do not necessarily reflect those of Eurizon SLJ Capital Limited, Eurizon Capital SGR or the Intesa Sanpaolo Group.
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