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Ho-ho-ho

What a difference two weeks can make! In early November, investors were seeing the world end, as a chaotic US election loomed and the pandemic seemed out of control outside of Asia. Now, by mid-November, the election outcome seems rather clear: a favourable gridlock that will be hard to over-turn.

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On the pandemic front, the odds of successful vaccines have risen following positive news by Pfizer/BioNTech. Some of the cyclical markets, like Europe, have been up double-digit percentage points since then. The Nikkei is trading at 29-year highs (see number of the week). Too good to be true? Sceptics remind us that investor sentiment has spiked to 3-year highs due to abounding enthusiasm.

We agree to the extent that being long risk assets, such as global stocks, is by no means a contrarian trade by mid-November 2020. Yet a year-end rally is underway according to our technical analysts. The reason why this rally could have further legs is the fact that many risk assets are still under-owned by a large margin. Here we speak of franchises that are tied into business cycles, i.e. they go up and down in line with expected economic activity, or simply ‘cyclicals’ as financial jargon has it.

The eurozone stock market is a poster-child of cyclicality. Hence, we have upgraded eurozone stocks versus large-cap Swiss stocks, which are a non-cyclical stronghold on average. This does not mean that we expect Swiss equity indices to drop from their lofty levels. Rather, we see more potential elsewhere – in the eurozone, for instance, but also in Swiss small and mid caps. We reiterate our positive view on materials stocks and point to Japan, which is in an historical ‘break out and away’ situation.

Clients ask us whether this is the end of the Nasdaq leader-ship in stock markets. We do not think so. Therefore, we refrain from dumping the new economy names. If anything, the good-old quality household names will tread water in the weeks ahead, while cyclicals will play some catch-up.