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Cross-Asset Quarterly Outlook

December 2020*

The Light, Finally!

Much of the fog of uncertainty that dominated our analysis in the September Cross-Asset Quarterly lifted over the past three months: Joe Biden won the election for the US Presidency, holding the promise of more predictable policies and less strained foreign relations, while the early and successful advent of three Covid vaccines suggests an end to the pandemic’s scourge and a return to economic normality before soon.

The confluence of these forces has underpinned a narrative of a strong economic rebound in 2021. A few difficult months still lie ahead – the story goes – but then a strong recovery fuelled by the vaccine rollout, ultra-loose monetary policy and the release of pent-up demand (on the back of soaring household savings) would take hold. Indeed, the IMF forecasts world economic growth of 5.2% in 2021 (3.9% in DMs and 6.0% in EMs), following a smaller-than-previously expected contraction of 4.4% this year. The OECD too has revised its outlook, now expecting a smaller economic contraction in 2020 (as the world experiences multiple waves of contagion) than it did under its single-wave scenario earlier in the year.

Markets have taken the news in their stride, all the more so on the back of the nomination of Janet Yellen as the next US Treasury Secretary and some recovery in corporate profits. The hallmark of this was a major rally in global stocks with several indices, notably the US, reaching record highs. US inflation expectations reached their highest level in 18 months, the broad dollar index dropped to a 30-month low and gold lost its shine, dropping some 9% from its November high. Industry surveys point to strong inflows into money managers, a sharp reduction in cash held by fund managers and a sharp drop in short positions on US stocks. In addition to major equity indices reaching new highs, there has also been a significant rotation into previously shunned stocks such as European bank shares, global energy stocks and airlines, whereas the run on US technology stocks (often regarded as “Covid insurance”) has come to a sudden halt.

Asset Allocation


  Chg -3 -2 -1 0 +1 +2 +3
Equities              
Rates -              
Credit -              
Real Estate -              
Commodities -              

Source: City of London Investment Management

*The publication reflects asset performance up to November 30, 2020, and macro events and data releases up to December 9, 2020, unless indicated otherwise.

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The information contained herein is obtained from sources believed by City of London Investment Management Company Limited to be accurate and reliable. No responsibility can be accepted under any circumstances for errors of fact or omission. Any forward looking statements or forecasts are based on assumptions and actual results may vary from any such statements or forecasts.

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© 2021 City of London Investment Management Company Limited.
All rights reserved.

City of London Investment Management Company Limited (“CLIM”) is authorised and regulated for the conduct of investment business within the UK by the Financial Conduct Authority (FCA), registered as an Investment Advisor with the United States Securities and Exchange Commission (SEC) and regulated by the Dubai Financial Services Authority (DFSA). Registered in England and Wales No. 2851236. Registered Office: 77 Gracechurch Street, London, EC3V 0AS, England.

© 2021 City of London Investment Management Company Limited. All rights reserved.