November 2020 Commentary

The US election saga and positive vaccine news-flow were the main drivers of the markets during the month of November. Joe Biden has been elected as the new US president and cabinet appointments, with Ms Yellen back on the fore front, seems to promise a return to policy-making normality, with closer coordination between fiscal and monetary policy. The first coronavirus vaccines are on track for international deployment within weeks on both sides of the Atlantic. This improves the prospects for a recovery in the global economy, and this has subsequently been reflected in asset prices worldwide.
An agreement between the UK and the European Union over a trade deal following the UK’s exit at the turn of the New Year remains elusive. Both sides remain pushing a hard bargain, but are steadfast in keeping the communication channels open in order to arrive to a solution sooner rather than later.
Despite the positive undertones for 2021, the immediate picture remains strained, with record virus cases in the United States, and selectively in Europe. The resultant lockdowns and social distancing measures have upended the momentum in risk assets following the announcement of the multiple vaccines and rollout plans thereof. Additionally, President Donald Trump has refused to throw in the title and is making avail of all of his legal avenues to claw onto the presidency. Despite this, the market at large expects a smooth transition come January.
Data has become a very sensitive element for market participants as it depicts the strength of the recovery, particularly in light of the current restrictions in place in the West. Despite economic data confirming that the pace of recovery stalled over the summer, we are nowhere near the levels experienced during the first lockdown.
Indeed recent data reveals that mobility in Europe has held up rather well during the second round “lighter” version of lockdown restrictions. The use of cars has been hit much less than in March/April. In addition, trucking activity in Europe seems unaffected by the re-imposed lockdowns, in contrast to what happened earlier in the year.
Data has largely reflected the mood in the marketplace and unfolded as expected. Looking at Europe’s largest economy, Germany, PMIs indicated a consistent expansion during the month of November, with Manufacturing PMI at 57.8, compared to a consensus estimate of 57.9, and a previous reading of 57.9. Services PMI were less impressive, coming in at 46, signalling a renewed contraction, compared to 49.5 in the previous month.
Meanwhile, the Euro Area’s Manufacturing PMI indicated an expansion to 53.8, slightly above expectations of 53.6, while services PMI deteriorated further to 41.7 from a previous reading of 46.9. Services are expected to remain depressed until economies open up at full capacity again.

On the unemployment front, within the Eurozone area it inched downwards to 8.4% from a revised estimate of 8.5%. Moreover, consumer confidence remained stagnant, with readings coming in at -17.6. Collectively, despite some positive signs, indicators are suggesting that we are still at the very beginning of a fragile economic recovery.
Sovereign yields were conditioned by the risk-on mode with the German sovereign 10-year yield trading wider than the previous month at -0.571 compared to -0.625 at the end of last month. General sovereign rates were rangy and spread compression continued with credit tighter on both rating spectrums. These moves were more visible in peripheral sovereign debt on the prospect of further asset purchases by the European Central Bank. Portugal’s 10-year bond yield dropped below zero, temporarily joining the negative yield club.
Hybrids, both financials and non-financials, enjoyed decent total return. Primary markets were active with a flurry of new issues flooding the markets. There is still a lot of cash in the market to be invested, which should act as a strong bid for credit as an asset class.
The CC Euro High Income fund increased by 3.36 percent, underperforming the broader market, which increased 4.31 percent throughout the month of November. On a year-to-date basis, the fund is underperforming on a net basis due to the lower beta of the portfolio and the subsequent strong market recovery; albeit the volatility of the fund has been markedly lower than average resulting in a favourable Sharpe ratio. Throughout the month, the Manager continued to adjust the portfolio into attractive undervalued credit stories, primary within the AT1 space.

Going forward the Managers believe that credit markets will continue to be aided by the support of primarily monetary politicians, creating a positive technical environment. In terms of bond picking, the Managers will continue to monitor the current environment and take opportunities in attractive credit stories.