Global equity markets continued to rise in December, by around 2% in euros, pursuing the upward trend seen in November, when they gained almost 10%.
The year ended on two largely positive notes for the markets: the announcement of several vaccines effective against the novel coronavirus and the resolution of the US elections. In this regard, only the second round of the Senate elections in the state of Georgia had yet to take place: the outcome was a narrow victory for the Democrats.
From an economic point of view, activity contracted again at the end of the year as the pandemic regained ground. The decisions to impose curfew and lockdown measures once again limited possibilities for household consumption. The services sector is also suffering particularly badly, compounding its slow recovery compared to the manufacturing sector.
With the confidence of economic players yet to return, central banks and governments are likely to continue providing support to the economy. This is evidenced by the latest USD900 billion economic stimulus package that was voted through by the US Senate, the latest of a series of stimulus plans in both the US and Europe, totalling nearly 15% of gross domestic product.
Of course, the discovery of vaccines offers hope that the economy can recover in a sustainable manner. However, this recovery can only really take off once collective immunity is guaranteed, which is unlikely to be the case before the end of the first half of this year.
While economic fundamentals are weak, government and central bank support are key for the economy and markets.
We must not forget that we are in a low interest rate environment, and that it is likely to persist for a long time.
This is forcing investors to favour equities over bonds, the source of their potential outperformance. Long-term trends also suggest that we should remain invested in equity markets. As a result of all these factors, we are favouring equities over bonds. We have therefore overweighted equities in our portfolios to take advantage of this favourable environment.
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