• January 11th, 2021
• By Midsilver Investment Limited

During the review period, risky assets experienced a resurgence following optimistic vaccine updates in early November, after being relatively stable for a considerable duration. The blend of an unclear US election result and the second Covid-19 wave initially moderated valuations. The stock markets, especially in the US and China, experienced short-lived surges and abrupt downturns. However, upbeat vaccine news invigorated market morale, prompting investors to shift their focus to sectors battered by the pandemic. While the market's upward trend seemingly indicated enhanced business scenarios, apprehensions lingered regarding the significant gap between the still lofty or near peak pre-pandemic valuations and the ambiguous economic future.

A potential disparity in evaluating corporate risks seems to be on the horizon. While credit spreads in advanced economies encountered some fluctuations, they ultimately narrowed, nearing their pre-pandemic levels. Conversely, during the review, banks adopted stricter lending criteria. The hunt for returns and specific policy aids seemed to drive these opposing trajectories.

As Covid-19's second wave unfolded, central banks preserved their supportive approach. In significant areas, while they retained existing measures, they showcased determination to respond to economic challenges. Some central banks in other advanced and emerging market economies trimmed rates or expanded asset acquisitions.

Thanks to the sustained support of central banks, primary advanced economies observed strikingly low government bond yields. Long-term US yields maintained their ascent initiated post the Treasury's August revelation of an added boost in long-term bond offerings. However, around the election period, these yields saw some fluctuations. European sovereign yields moved downward, hinting that investors were anticipating more relaxed policies given the low inflation and frail economic prospects. This heightened quest for yield further contracted peripheral sovereign spreads.

Emerging market economies (EMEs) saw enhanced sentiments. China's appealing yields bolstered substantial portfolio inflows. For other EMEs, steady inflows to dollar-denominated bond funds persisted, with local currency bond funds starting to attract minor inflows in November. Backed by domestic monetary strategies and evolving trade opportunities, yields largely remained subdued.

Throughout November, the US dollar generally declined, having previously plateaued in comparison to both AE and EME currencies. The rise of the renminbi was especially noteworthy, driven by strengthening confidence in Chinese assets. Post-pandemic and during the assessment period, the relative strength of EME currencies seemed to be shaped by their economic structures. EMEs rich in technology or deeply embedded in global manufacturing value chains experienced currency fortification compared to those centered around commodity production.