The rapid shift into risk-on gear by investors over the past few weeks has laid a perfect pitch for global equities to hit a historical homerun. If things go well in the remaining two trading days, The MSCI World Index – already a hefty up month-to-date – will notch the highest monthly return in more than four decades.
The rally in equity markets comes on the back of easing of risks which were weighing on investor’s minds over the past few months. The recent breakthroughs in the development of a Covid-19 vaccine is by far the biggest factor buoying markets. Three vaccines have so far shown better than expected efficacy which raise hopes for a quicker than expected return to some form of normalcy and ramping up of economic activity particularly in those sectors which were held back by lockdown restrictions and social distancing measures. Trump’s legal team’s failure to gain any traction in courts in its bid to overturn the recent election result is also sentiment positive as it reduces the probability of a delayed inauguration of Joe Biden which many investors were expecting prior to the elections. Other tailwinds include low odds of a crash-out Brexit as well as the return of predictability in US foreign policy during Biden’s administration.
Will the bull run last?
If the vaccines are approved and distributed to many people speedily, we could see a resurgence in corporate profits in the second quarter of next year which would help equities maintain their momentum. Another factor to consider is that despite the recent rally in equities, valuations of several segments of the equity market are still below historical averages which leaves room for further upside should economic activity picks up as expected. Nonetheless, we expect the recent rally in November to somewhat eat into the Santa rally, so December may not be as generous as it used to be.
