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SystematicEdge Monthly Market Overview January 2021: Cash Injection versus Virus Infection

Market Context: Cash Injection versus Virus Infection

Global Macro: 

The world economy is experiencing a slower recovery than expected in Q1 2021 as lockdowns are being rolled out again around the world and the vaccination process is delayed. In the short term, the economic recovery is being challenged but, in the medium term, the most likely scenario remains intact with global vaccination as the key to end the pandemic. In the meantime, we believe “cash injections”, i.e. liquidity provided at near zero interest rates by central banks combined with governments’ stimulus packages, will continue to underpin the growth of equities and risky assets in general and hopefully be sufficient to support the economy while virus infections remain prevalent. In the US, Biden’s stimulus plan – amounting to 9% of US annual GDP – will be the largest in the world and most likely generate stronger economic growth than in Europe. China is ahead of the game: its economy never stopped growing and we expect it to remain by far the largest contributor to the world’s economic growth. The UN announced in January that China became the number one country in the world for Foreign Direct Investments in 2020, thus contributing to the strengthening of the renminbi and consolidating its role as a major trade currency.

Financial Markets:

 Against this macroeconomic backdrop, global equities experienced negative performance in January, down a few percent except for Chinese equities, whose rally reflected the country’s sustainable growth. We note Hong Kong shares outperformed mainland stocks, backed by H-shares’ relative cheapness, while Hong Kong’s recent ordeals – the protests, US sanctions, Covid crisis – are gradually coming to an end. The outlook for positive earnings in 2021, which is contingent on vaccination success, will clearly support the equity market. However, given ongoing uncertainty amid the global “Cash Injection versus Virus Infection” battle, we anticipate repeated periods of heightened volatility throughout the year, which will only cease once the virus is fully contained.

Equity: Month to date the S&P 500 lost 1.4%, Euro Stoxx 50 -2.0%, Hang Seng +3.9%. Fixed Income: 10-year US yield rose 18bps in January to 1.09%. Emerging market government bonds declined 2.0% in USD and 3.4% in local currencies. High-yield corporate bonds edged down 0.3% in EUR and up 0.2% in USD. Currencies: With respect to USD: EUR -0.8%, CNY +1.5%, AUD -0.7%; safe haven JPY -1.5%, CHF -0.6%. Commodities: Oil prices continued to rise in January while gold prices contracted: WTI Oil +7.7%, Gold -2.7%.


Following the recent US election and Democrats’ congressional win, as well as the resurgence of the pandemic, here is the list of major risks we have identified for 2021:

  • Covid-19: Given new restrictions across Europe and the US following the new wave of infections, we see increasing near-term downside risk to the world’s economic growth outlook.
  • Bankruptcy wave: The number of bankruptcies has been rising amid the economic recession and could worsen in the coming months.
  • Tech bubble: Tech stocks remain under pressure, given the highest valuations since the dot-com era and high market concentration, while the Biden administration is expected to take a much stronger stance on the tax and anti-trust treatment of Tech companies.
  • Central banks’ tapering: At some point, central banks will reduce cash injections and taper their bond purchasing programs, which will result in higher interest rates and downward pressure on equity valuations.
  • US-China tensions: US-China trade frictions remain strong, with increasing tension around Taiwan and the South China Sea. Although President Biden might be more inclined to adopt a multilateral approach with China than his predecessor, he has already sent signals that the US will remain tough on China on such issues as trade and technology.
  • UK-specific Brexit risk: The UK market may further be affected by the combined effect of Brexit and the Covid crisis.


  • The unique combination of China’s strong growth dynamic and the moderate growth of Hong Kong-listed Chinese stock valuations – still below the peak of 2018 – makes H-shares particularly attractive for investors.
  • Following the US election ‘blue wave’, investors are positioning themselves for higher long-term rates in the US and more generally the end of rate cuts. This is positive for the banking and insurance sectors where valuations continue to look attractive. We expect stocks of well-capitalized quality banks to pay an above-market dividend yield contingent on their central bank’s green light.
  • The Oil & Gas sector partly recovered in 2020, yet still trades at half the book value of the market, its lowest level since 1928. We are seeing more interest from investors towards major energy players that are implementing green energy programs to transition from fossil fuels to clean, sustainable energy production, thus making them major decarbonization contributors.