Mechelany Advisors’ Weekly Review 14 Nov 2020
Mechelany Advisors' WEEKLY MARKET REVIEW highlights the salient feature of the past week, details specific issues of the moment and reviews the Mechelany Advisors' MODLE PORTFOLIO
The Week in Review
Weekly Performance Monitor
Equities Year to Date
Weekly Market Comment
VIRUSES, WARS AND EXECUTIVE ORDERS
On Monday, the announcement by Pfizer that the phase 3 clinical trial of its Covid-19 vaccine delivered very promising results sent equity markets shooting-up wildly with many traditional company shares rising by 15 to 20 % in the US, Europe, Japan, China and Emerging markets .
This extremely volatile week saw the most extreme rotation seen in decades out of Technology and COVID related stocks and into traditional industries and value stocks triggered massive disruption for quant fund managers and hedges funds alike, questioning the logic of investing they had followed for years.
The victory of Joe BIDEN seems to be assured with the final count of Georgia giving him 306 votes from the electoral collage against 263 votes for Donald Trump who refuses to concede defeat and multiplies legal challenges unsuccessfully for now.
Some Republican Senators are now siding with Joe Biden wanting a harmonious transition but Donald Trump seems to be counting on a final legal challenge in front of the Supreme Court relating to in-mail voting with little chances of success, but his strategy is more driven by the desire or the need to project to his electoral base that the 2020 Presidential election was stolen from him illegally. The D-Day will be December 14th when the final vote of the Electoral College will take place, designating Joe Biden as the next President of the USA.
Another important milestone will be the re-run of two Senator seats from Georgia scheduled to take place in January and that could give Democrats the majority ion the Senate as well. That would be a truly positive development for the American economy and the world financial markets.
At the same time, the surge in COVID contamination and deaths led France, Spain, Australia and many other European countries to enact severe lockdowns to eradicate the propagation of the COVID virus.
Joe Biden nominated a task force of extremely competent people to advise on the virus strategy and is leaning towards lockdowns in the US as well to quash record numbers of contamination and hospitalisations in the US.
The prospects of a strong recovery in the 4th quarter are dimmed to say the least.
China enacted stringent regulations on its own internet giants with a view to proactively contain their rise and influence, in the wake of the cancellation of the IPO of Ant financial in Hong Kong. China also put pressure on the dissenting lawmakers in Hong Kong leading to their resignation on Thursday.
Finally, in an impulsive and potentially far-reaching last battle move on Thursday, Donald Trump signed an executive order banning US investors from investing in 34 Chinese companies accused of dealing with China’s People’s Liberation Army. This sent Chinese equities falling sharply on Friday but it remains to be seen how this Executive order scheduled to take effect on January 9 could be implemented by US Pension funds and Financial institutions that may be holding these shares on behalf of non-American clients.
This unique and unprecedented move will probably be challenged in the US Courts of Justice and highlights once again the exorbitant powers of American Presidents that can be used destructively.
If upheld legally, this Executive Order could have wide repercussions on the world financial markets.
China could well do the same, targeting US corporations doing business in China, order Chinese financial institutions to dispose of American shares and lead the Chinese Government to dispose of its 1 Trillion holdings of US Treasury bonds with massive consequences for the US bond and Equity markets as well as for the US dollar.
Once again, this look more like an attempt of Donald Trump to paint himself as the sole defender of America rather than a truly enforceable measure and its is likely that Joe Biden will reverse these executive orders as soon as in power. China will also probably exert restraint in its retaliation pending the transition of powers to Joe Biden.
Previous attempts at targeting Chinese companies have globally failed with Tik Tok and We Chat getting reprieve from US Courts of Justice in the implementation of previous Executive Orders of Donald Trump targeting these companies.
Global equity indices ended the week less strongly than they started adding only 2.5 % on average with European and Spanish stocks taking the lead with an average 8 % rise and almost 14 % for Spain.
Massive rotation is truly visible in the weekly performance of the US stocks indices where the Dow Jones Industrial added 4 % on the week while the Nasdaq fell by- 0.55 % in a sea of green otherwise.
The Leaders of the secular bull market, the FAMANGS performed really badly, losing 3 to 5 % on average on the week despite the renewed prospects of lockdowns. AMZN, NFLX, AMD and FB all lost more than 5 % while MSFT and APPL barely made it in positive territory.
The leadership of tech is over and those stocks have peaked in a lasting manner.
Conversely US cyclical stocks and many European cyclical shares rose by 20 % or more on the week on massive volumes
The disconnect between the positive drive of equity markets and the resurgence of the virus and the implementation of severe lockdowns in many parts of the world is striking.
Equity markets are looking decisively forward to a strong economic recovery once the virus is tackled thanks to a vaccine, but even a functional vaccine at the beginning of 2021 may not be sufficient to boost economic activity if the world Central Bankers are to be listened to. They all called for caution on anticipating too positive economic momentum.
US bonds were weaker and yield are backing up having broken the downtrend in place since the beginning of the year. Commodities were also sharply higher saluting strong economic number out of China and Asia.
The US employment numbers released last week were on the strong side with better than expected initial jobless claims. However, the US economy is still destroying close to 800 000 jobs a week , still way higher than at the nadir of the 2008 Great Financial Crisis and the number of Americans out of a job is still hovering above 20 million, a record high since 1930.
Finally, and to conclude on our Weekly Review, we rate the probability of a war in the Middle East as the highest we have seen in years.
As our regular readers know, we have written many times about the dynamics at play in the Middle East and the building-up of the tensions in the region.
As we correctly predicted, a Global Peace has actually been reached with the Arabs and the Israelis coming together and the treatment of the Palestinian problem economically rather than politically.
This is probably the biggest achievement of the Donald Trump Presidency .
However, today, and as as we expected, the only two remaining obstacles to a lasting peace in the Middle East are Iran’s Nuclear Weapons and the presence and influence of Hezbollah in Lebanon.
Benjamin Netanyahu warned the world on September 28th 2020 at the general assembly of the United Nations that Iran would have two nuclear bombs in a few months and that Israel would never accept that. He also warned that Hezbollah was a threat to the Lebanese People and the Israeli People because of its offensive weaponry.
The change of US Administration is accelerating the calendar as any Israeli military action in the Middle East may not benefit from the same support from a Biden administration.
It cannot be excluded that Donald Trump could use his last weeks in office to support a military action there and last week’s demise of Mark Esper, his Defence secretary, as the refusal of the President to communicate to Joe BIDEN the daily security briefings of the White House may well need to be read in that context.
We are of the view that the BIDEN administration will keep a hard line on Iran while re-initiate talks that will encompass a global agreement with Iran, dealing with Nuclear Weapons as well as dealing with the support given by Iran to Hezbollah, the Yemeni Houthis rebels, the Show militias in Iraq and President bashar El Assaad in Syria.
America WANTS to solve the Middle East situation and contain the Iranian Mollah’s regime. It is difficult to assess what the outcome of such negotiations could be, but Donald Trump could well be tempted to force the issue through a military option that would change the cards completely in the Middle East.
Mike Pompeo is touring the Middle East right now and Hezbollah itself warns of a possible conflict to come.
The coming eight weeks are the period of maximum risk in our view. We obviously have no certainty that it will happen and it is clear that no one really wants a conflict, but some situations can only be solved through war and a final conflict in the Middle East would be devastating for Iran and Lebanon.
It would send oil prices sky-rocketing, with a major impact on bonds, Gold and equity markets.
MODEL PORTFOLIO 14 Nov 2020
The combination of strong European and Chinese equities and weak FAMANGS had a double whammy effect on our portfolio with both the long and shorts of our investment policy being positive contributors.
Our MODEL PORTFOLIO rose + 11.67 % on the week, going back into positive for the year.
Our cumulative Performance is now 230 % over the past 6 years and 10 months, significantly outperforming each and every equity index in the world with a +19.67 % compounded average performance per annum
We had an extremely busy week in line with the volatility, adding to positions in China and Japan at the beginning of the week while removing our European hedges.
We took profits on some of our high flyers such as electric vehicle leader Dong Feng Motors in China, Weibo and Baidu in the US and we closed our very profitable investment in Bitcoin.
We also took advantage of the very sharp rise in European equities to take profits and reduce exposure and re-instated our short on the Eurostoxx 50 index as the move is excessive.
We even hedged some of our Chinese equity exposure before China enacted sanctions on the Internet giants.
Finally we added exposure to Oil for the first time in two years, as a hedge against military action in the Middle East. Oil should be supported by a recovery in air and road travel in the first quarter of 2021 and additional production cuts by Saudi Arabia and Russia.
Charts of the Week
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