Inflows into stock funds hit 20-year high

Firepower boosts equity markets on back of Covid-19 vaccine breakthrough

Eric Platt and David Carnevali in New York

Global stock markets hit new records this week © Reuters

Investors ploughed more into global stock funds in the days after Pfizer unveiled its coronavirus breakthrough on Monday than in any week in at least two decades, as the news electrified financial markets.

Funds that buy stocks counted $44.5bn of inflows in the week to Wednesday, including more than $32bn that was invested in US stock funds, according to the data provider EPFR Global. It was the largest weekly haul by equity funds since EPFR has been collecting the data, as well as the second-biggest intake by US stock funds since 2000.

The firepower helped to lift global stock markets to new records this week, as investors bet the vaccine from Pfizer and Germany’s BioNTech could provide a path to a quicker global recovery. The coronavirus outbreak has pushed most major economies into recession this year.

The new commitments were driven by large institutional investors, including pensions and endowments, which added $41.1bn to their stock positions this week. Retail investors, by contrast, accounted for just $3.3bn of the inflows. 

While online brokerages such as Robinhood have had a surge of trading activity this year, much of it has been directed to individual stocks, bypassing traditional fund managers.

The benchmark S&P 500 has climbed more than 9 per cent since the start of November, its best 10 trading days since April, when the Federal Reserve promised additional support for the market and stocks bounced off of their lows for the year. 

The index closed at a new record high on Friday for the first time since the start of September.

“The vaccine announcement supercharged the ‘return to normalcy’ rally that followed the US election,” said Matt Gertken, a strategist at BCA Research. “It will take time to distribute these vaccines but the world can look toward economic recovery next year.”

The rotation back into US stocks reversed the vast majority of outflows tallied since the year began, and followed the result that Joe Biden had won the US election. 

US equity futures began rallying on that news, which preceded the announcement from Pfizer and BioNTech on Monday morning.

Cameron Brandt, the director of research at EPFR, said the victory by Mr Biden had shifted expectations of investors, who now anticipated predictable policymaking and economic stimulus. 

He added that the flood of cash into equity funds favoured large-cap companies, even though small-caps had far outpaced their bigger rivals over the five trading days.

The prospect of a divided government, where Republicans hold the Senate, has also prompted investors to dial back their expectations of dramatic regulatory or tax changes when president-elect Biden is inaugurated in January, Allianz Global Investors portfolio manager Burns McKinney said.

That could boost stocks further. John Normand, a strategist with JPMorgan Chase, said on Friday that US stocks had “one of the best backdrops for sustained gains in years” and that the election outcome presented a “Goldilocks outcome for equities”. 

The bank forecasts the S&P could climb a further 12 per cent to reach 4,000 by early next year.

Rising coronavirus cases and further travel restrictions could still hamper US equities, and Lisa Erickson of US Bank Wealth Management said she was still avoiding the “scene of the accident” stocks hit hardest by the pandemic. But she said the vaccine developments had provided new optimism to the market.

“That provides not certainty but some nice tailwind for further reopenings and upturn,” she added.

PLATINUM BEGINS A NEW RALLY – GOLD & SILVER WILL FOLLOW

Chris Vermeulen

My researcher team and I have highlighted a number of recent articles about Gold and Silver and how we believed the longer-term price activity and technical analysis supported a broad market advance in Precious Metals over the next 5+ years.  

If not, check out Part I and Part II of our recent Gold and Silver research and price predictions.

Today, we are seeing further evidence that metals are on the move – in Platinum. Platinum has been trading below $1000 for quite a while and this is roughly HALF the price level of Gold.  

Typically, Platinum rallies before Gold rallies in a traditional trending phase.  Platinum rallies because it is used in industrial and other fields – thus it rallies in an advanced market rally phase.  

Gold begins to rally when a certain level of fear enters the markets or the markets enter a depreciation phase.

Currently, we are watching Platinum rally above $1000 for the first time since August 2020 and it appears new all-time highs in Platinum are on the horizon.  

This suggests Gold and Silver will follow this upward trend in another rally phase and attempt to set new all-time highs as well.

DAILY PLATINUM BREAKOUT PENDING

This Daily Platinum chart highlights the Rounded Bottom formation that setup between September and November 2020 after the August highs peaked out near $1020.  

The recent rally in Platinum has begun to accelerate and we believe an upside breakout move is pending.  This may prompt Platinum to rally above $1250 or more over the next few weeks/months.

THE WEEKLY PLATINUM CHART

This Weekly Platinum Chart highlights the broader market trend in Platinum and the resistance level (RED LINE) that is currently about to be broken.  

Once this resistance level is breached, a bigger upside move may begin where Platinum may target $1250 or higher fairly quickly.

As you can see from We believe this move in precious metals aligns with our previous research that a broader market Depreciation phase has set up in the global markets.  

We believe precious metals are about 24 months into a 100+ month broad market depreciation cycle.  

This means that we may see a rally in metals that lasts for several more years.

As many of you may already know, we love the metals and we love to apply our technical analysis skills and pattern research onto these charts.  

Could you imagine the scope of the rally that is setting up in Platinum mirrors the 2003 to 2010 price rally – just waiting for this breakout pattern to complete?

Get ready because this could be one of the biggest upside price moves in precious metals in over a decade.   

Vaccines not politics are driving the soaring markets

‘Cheap’ UK equities stand to benefit from a rotation into companies that will rise with a recovery

Merryn Somerset Webb

© Ingram Pinn/Financial Times

Earlier this week, the Dow Jones Industrial index hit 30,000. You can say the Dow is an outdated index. 

You can say that this isn’t a record high in real terms. But record round numbers still mean something to market watchers — and the much broader S&P 500 has risen around 8 per cent since US election day.

Cue a flurry of comments to the effect that the milestone reflects the fact that the stock market prefers, as one Twitter user put it, “sensible” Joe Biden to “lunatic” Donald Trump. (Never mind Mr Trump’s pre-election claim that a Biden victory would lead to a stock market crash and a “crippling depression the likes of which you have never seen”.)

But does the latest bull run really tell us that? It’s a tough case to make. After all, between Mr Trump’s 2016 election and the middle of February, when Covid-19 began to bite, the Dow and S&P both rose more than 60 per cent.

Valuations have also risen to historically extreme levels: Mr Trump is handing Mr Biden a US market where the S&P 500 has an average price to reported earnings ratio above 30 times against a historical average of more like 15 times. If investors have been nervous of investing in the US under Mr Trump, they have had a funny way of showing it.

It is tempting to see events through the lens of political preferences, but is the stock market as interested in politics as we are? Perhaps 30,000 has no moral element to it at all. Mr Biden’s win coincided nicely with the release of excellent news about three coronavirus vaccines. Stock markets are very good at looking through noise.

Surely the market strength reflects the fact that barring rollout disasters, we should have our normal lives back within months — that means travel companies can make schedules and cinemas can advertise blockbusters.

Now add in the widely held assumption that the expected new Treasury secretary Janet Yellen will deliver the additional stimulus she has called for, and the newish Federal Reserve rhetoric that holds interest rates need to stay low to give inflation time to catch up so that it can rise above the historic 2 per cent target.

Suddenly it makes perfect sense to think that pent up demand and possible productivity gains created by the crisis could help set off what Goldman Sachs calls the Roaring 20s Redux.

Perhaps, barring extreme political promises of long-term dividend bans, super-high corporate taxation and capital controls, developed markets don’t much care about the personalities of presidents at all.

With that in mind, take a look at the other market that is also heavily influenced by politics — the UK. British stocks are ridiculously cheap. The FTSE All-Share hit the same record relative low this year against the S&P 500 as it did in 1974. Back then the UK had both capital and long-term dividend controls in place.

Global stocks as a whole are trading on a multiple of twice their sales for the next 12 months, says Schroders. This is 45 per cent higher than the average for the past 15 years. But, in the UK, large companies are trading on about one times sales and small-caps on only 0.5 times forecast sales — both are below the 15-year average.

Analysts will tell you that this is because of the uncertainty around Brexit (I’ve done it myself). This doesn’t chime with the idea that stock markets can look through short-term trouble. It is tempting to assume that the market reflects the political prejudices of its watchers.

But the real reason for UK cheapness might actually be the nature of the stocks that are listed here. The US is easily categorised as a growth market — the main value of its listed companies is in future earnings.

In the UK, the exciting growth potential is found in private companies. The listed UK sector is a classic value market: investors expect relatively little from the future earnings of its old energy companies, miners and financials. And value investing has been enduring its worst run in two centuries. The relative valuation gap between growth and value is near record levels.

Near, rather than at, because over the past few weeks a reversal has begun — a shift from Covid-19 winners to Covid-19 losers and from growth to value. Energy and commodities have been strong, for example.

In the US, November 9 saw value stocks outperform growth by the largest one-day difference on record. And so far this month, the FTSE 100, which I think is the ultimate value index, has returned nearly 14 per cent, compared with 10 per cent for the FTSE All-World index.

A global rotation into value is really another strand of vaccine-related trade because it reflects the performance of companies strongly linked to economic fundamentals. If the reopening of the world economy continues, that trend will too. 

Brexit will be resolved around the same time. If there is a deal of any sort, analysts are sure to announce that the market prefers a sensible deal over a lunatic no-deal exit.

But do not forget that something else is affecting the UK market — and it is at least as strong as Brexit relief: a vaccine-triggered rotation that was going to happen anyway.

Hungary and Poland Threaten E.U. Stimulus Over Rule of Law Links

The two illiberal governments, having been enabled by the bloc’s leaders and evaded punishment, now hold a 1.8 trillion euro package hostage.

By Matina Stevis-Gridneff and Benjamin Novak

BRUSSELS — When European Union leaders announced a landmark stimulus package to rescue their economies from the ravages of the coronavirus, they agreed to jointly raise hundreds of billions of dollars to use as aid — a bold and widely welcomed leap in collaboration never attempted in the bloc’s history.

But that unity was shattered on Monday when Hungary and Poland blocked the stimulus plan and the broader budget, cracking open one of the bloc’s most persistent, existential divisions over what a European Union democracy looks like.

The two eastern European countries said they would veto the spending bill because the funding was made conditional on upholding rule-of-law standards, such as an independent judiciary, which the two governments have weakened as they defiantly tear down separation of powers at home.

Their veto has thrown a signature achievement of the bloc into disarray, deepening a long-building standoff over its core principles and threatening to delay the stimulus money from getting to E.U. member states, if a new agreement can be reached at all.

Many E.U. nations are currently in the grips of a new round of nationwide lockdowns as a second wave of the virus has sent cases soaring in some places to levels rivaling the scourge last spring, inundating hospitals, shuttering businesses and leaving countries desperate to get their economies revitalized.

The show of force by Prime Minister Viktor Orban of Hungary and, to a lesser degree his Polish counterpart, Mateusz Morawiecki, was the most prominent display yet of how the two members are now able to hold the bloc hostage on a major issue like protecting democratic values — and the E.U.’s relative powerlessness to stop them.

Mr. Orban has been emboldened by the tolerance of fellow European Union leaders, the impotence of the E.U. institutions to hold his government to account for violations of E.U. laws and standards, and the cover that President Trump, a close ally, has offered over the past four years, elevating both his policies and rhetoric on the global stage.

At an E.U. ambassadors’ meeting on Monday, the two eastern European governments effectively blocked the stimulus and budget package, sending shock-waves through the policymaking machine in Brussels and officials scrambling back to the drawing board to rescue the budget quickly.

E.U. leaders will now attempt to break the stalemate at a teleconference on Thursday, but it was not clear whether that would lead to a diluted version of the offending language to appease Hungary and Poland, or to further negotiations with the two countries and the European Parliament.

The 1.8 trillion euro, or $2.1 trillion, multiyear budget at stake contains at least 750 billion euros aimed at helping members’ economies out of the catastrophic recession unleashed by the coronavirus pandemic. 

Agreed upon in July after tough negotiations among national governments, the new budget was the first time that the E.U. had agreed to jointly issue debt and amounted to a groundbreaking change in the bloc’s willingness to mobilize resources collectively in a time of crisis.

But at the insistence of the European Parliament, which must approve spending, the budget bill passed earlier this month included language making the funds contingent on rule of law standards that the E.U. considers fundamental to its values. 

The item was clearly aimed at the Hungarian and Polish governments, which have defiantly chipped away at independent judiciaries among other democratic norms.

Hungary in particular has also resisted greater transparency in how Mr. Orban’s government spends E.U. subsidies, at times steering funds toward political allies in an environment of cronyism.

Both Hungary and Poland, undemocratic outliers, have enormous leverage because elements of the stimulus and budget package must receive the unanimous approval of member states.

Hungary and Poland, conversely, say it is the E.U. bureaucracy that is trying to coerce them.

“Without objective criteria, based on ideology, they want to blackmail countries without providing them legal remedy,” Mr. Orban said in an interview Friday criticizing the budget and stimulus bill. “This is not what we wanted. This is not why we created the European Union, so that there would be a second Soviet Union,” he added.

A delay in the bill beyond the end of November would push the deployment of the funding back into the new year, and would hurt the E.U. deeply. As the pandemic drags on, the bloc’s economy is sinking deeper into recession and national stimulus programs are rapidly depleting.

“When we have millions of E.U. citizens and businesses that need an E.U. lifeline and are on the brink of bankruptcy, to use this blackmail so they can throw out judges they don’t like and stuff money in their pockets, it’s the least solidarity-based action I’ve seen in the E.U.,” said Daniel Freund, a member of the European Parliament who participated in the stimulus and budget negotiations.

Hungary and Poland have long been in the European Commission’s cross hairs for such violations. They are the only two countries in the history of the E.U. to have been investigated by the Commission, the bloc’s executive arm, under the so-called Article 7 of its treaty, which allows for the suspension of a member state’s voting rights if it is found to be repeatedly violating fundamental E.U. values.

But the efforts to hold the two governments accountable have failed: ultimately, suspending one member’s voting rights would require a unanimous vote by the rest, and Poland and Hungary would always veto each other’s punishment.

In its first ever Rule of Law Report for Hungary in September, the European Commission noted the bloc’s yearslong concern over judicial independence, the “systemic lack of determined action to investigate corruption cases involving high-level officials or their immediate circle,” steps taken to curb media freedom, and attacks on civil society.

Responding to the report’s findings, Mr. Orban’s government circulated a document in Brussels, categorically rejecting the concerns raised by the Commission, adding that the report denied Hungary the right to a fair hearing.

European Commission officials lament the limits of the legal tools they have to force Hungary and Poland to change course. But experts have also been critical of European Union leaders, including Chancellor Angela Merkel of Germany, for enabling Mr. Orban’s behavior.

Ms. Merkel, whose country now holds the E.U.’s rotating presidency and shepherded the stimulus deal, was originally against the idea of tying E.U. funds to the rule-of-law mechanism as she and other E.U. leaders have shied away from opening more rifts that could further compromise the bloc in the aftermath of Britain’s departure.

“This veto demonstrates the dangers, or the cost, to the E.U. of not having stood up to these regimes earlier,” said R. Daniel Kelemen, professor of political science and law at Rutgers University.

“Now that they are consolidated autocracies, they can try to hold the E.U. hostage to keep their money coming,” he said.

Concerns over Mr. Orban’s authoritarianism have grown during the pandemic. He has used the crisis to continue consolidating power, and Hungary’s parliament extended Mr. Orban’s sweeping executive powers to combat the surge in coronavirus cases.

But critics charge that Mr. Orban has used his expanded authority to pursue measures that have nothing to do with the pandemic, like his desire to perpetuate a culture war against the L.G.B.T.Q. community.

Last week his government pushed forward with a sudden barrage of bills that, if adopted, would restrict marriage as an institution between a man and a woman and make it much more difficult for gay couples to adopt children. 

Some would also change election laws to strengthen Mr. Orban’s prospects to retain power and tweak the legal definition of public funds to obfuscate suspected cases of corruption.

Mr. Orban’s ascent to European culture warrior has also been bolstered by his close links to President Trump, whose defeat by Joseph R. Biden Jr. in the U.S. presidential election may now provide the E.U. with new chance to rein in the Hungarian leader, said Veronica Anghel, a Political Science Fellow at Johns Hopkins School of Advanced International Studies and at the European University Institute.

“Having the U.S. back as an ally will give the E.U. another push to be less complacent with what’s happening in Eastern Europe,” Ms. Anghel said. “Biden is very interested in making democracy a theme in his agenda, and it’s likely he will look more closely at troublemakers in Eastern Europe.”

But, Ms. Anghel added, “It’s still the E.U. who makes the call.”

Matina Stevis-Gridneff reported from Brussels and Benjamin Novak from Budapest. Monika Pronczuk contributed reporting from Brussels.

A No-Brainer for the G20

The sooner we get the COVID-19 pandemic under control, the sooner we can put the global economy back on track. At a virtual gathering this month, the G20 will have an opportunity to do precisely that, provided that world leaders are able to see the economic windfall that is staring them in the face.

Jim O'Neill

LONDON – We may soon witness the bargain of the century. G20 leaders, representing the world’s largest economies, will discuss COVID-19 this month at a virtual summit, where they will have a chance to secure a return on investment that would make even the legendary investor Warren Buffett blush.

With less than one-tenth of one percentage point of global GDP, the international community can vastly expand access to life-saving COVID-19 tests, treatments, and vaccines (once they are available), thereby putting the global economy back on track to long-term growth and stability.

Investing now to ensure that effective diagnostics, therapeutic drugs, and vaccines are developed and distributed to people around the world is not only the right thing to do; it is also the smart thing to do. 

Enlightened self-interest dictates that we should be underwriting future demand for goods and services, so that global trade and growth can bounce back. This should be an easy call for G20 leaders.

But just in case policymakers have failed to recognize the returns that are on offer, here are the facts. Throughout the 1980s and 1990s, the world economy averaged annual economic growth of around 3.3%, and that rate increased to 3.7% over the past two decades, owing to the rise of China and the other BRIC economies (Brazil, Russia, and India). 

In the 2020s and 2030s, however, growth will have to be driven by a new group of predominantly low-income countries that are striving to climb the ladder to middle- and high-income status.

Back in 2005, my Goldman Sachs colleagues and I identified a set of countries that could become globally important economies in the twenty-first century. We called them the “Next Eleven” (N-11): Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, South Korea, Turkey, and Vietnam.

With an aggregate GDP of around $6.5 trillion – more than twice that of India – the N-11 already matters immensely to all of us in the global economy. Moreover, the latest projections show that if these up-and-coming economies do not reach their potential, the average annual global growth rate will start heading back to the 3.3% range. As COVID-19 continues to disrupt these key economies, this undesirable outcome is becoming more likely.

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Fortunately, there is already a clear path forward. The Access to COVID-19 Tools (ACT) Accelerator, which was created in April, offers a roadmap for ending the crisis through global cooperation. In the space of just six months, the ACT Accelerator’s partners have compiled the world’s largest portfolio of candidate vaccines, tests, and treatments, and have developed an advance-purchasing system to get these critical items to the places where they are most needed.

But to continue rolling out rapid testing, evaluating new treatments, and ensuring access to vaccines as soon as they are licensed, the ACT Accelerator will need a total of $38 billion – including $4.5 billion urgently.

The investment case for plugging these funding gaps is the most clear-cut that I have ever seen in my career. Compared to the $12 trillion-plus that G20 countries have already spent on mitigating the pandemic’s consequences, the amount needed to ensure the ACT Accelerator’s work is trivial. 

The International Monetary Fund estimates that if medical solutions could be made available faster and on a wider scale than its baseline forecast projects, the resulting cumulative increase in global income would reach almost $9 trillion by the end of 2025.

For developed countries, this shouldn’t even be a choice. G20 leaders can either act now to promote growth in the economies of tomorrow, or they can do nothing as their export markets shrink, leaving them even more dependent on their own sluggish domestic growth.

In other words, the interests of G20 countries and the rest of the world are directly aligned. The real-world ramifications of the pandemic are clear to see. For example, in August, the World Travel and Tourism Council estimated that the drop-off in global visitors to the United Kingdom would cost the economy £22 billion ($29 billion) this year.

By now, we should all know that the COVID-19 pandemic is an economic, human, and development crisis that can be stopped only by addressing the root cause. If G20 countries were to devote just 1% of their current stimulus spending on efforts to alleviate the economic consequences of the pandemic globally, they would more than cover the needs of the ACT Accelerator.

In the aftermath of the 2008 global financial crisis, the G20 demonstrated what the world’s leading economies could achieve by acting in their mutual interest. At this month’s virtual summit, today’s G20 leaders must rise to an even greater challenge. 

They have every incentive to do so.

Jim O’Neill, a former chairman of Goldman Sachs Asset Management and a former UK treasury minister, is Chair of Chatham House.