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Spirit of resilience: Market Risk Insights, Q4 2020

Last year, Albert Camus’s 1947 novel The Plague returned to global best-seller lists as people searched for a deeper understanding of the pandemic convulsing society.

Many readers would not have been disappointed. With nations enduring successive waves of covid-19 infections and consequent lockdowns on social, economic and community activity, Camus offers insight that transcends decades. Worldwide, people have arguably “reached the phase when plague would seem to them the very tissue of their existence; when they forgot the lives that until now it had been given them to lead”.

Successful trials and rapid production of vaccine in late 2020, combined with the return of political orthodoxy to the White House, presented investors with best-case scenarios at the end of a difficult year. And, even without an immediate vaccination programme, the global data show that in spite of escalating infections in some countries, the overall covid-19 death-rate continues to fall as health professionals apply experience to better treat patients.

A sense of cautious optimism is evident. As Camus described it: “Indeed it could be said that once the faintest stirring of hope became possible, the dominion of plague was ended”.

In this issue of Market Risk Insights, we observe financial indicators correlating with this spirt of resilience demonstrated in the pandemic. Snapshots of our analysis are as follows:

Investors have likely discounted the worst-case scenarios that flashed up amid the initial global covid-19 outbreak, when volatility hit a post-global financial crisis peak, but are understandably wary of the effects of the current second waves of infections. It’s likely that volatility will stay above pre-pandemic levels until reliable vaccination programmes are implemented.

We see persistent dislocations between several asset classes as momentum continues to dominate markets. Value, for instance, has persistently underperformed for over a decade, a track record exacerbated by the ‘stay at home’ trade’s support of growth companies. Could value stocks be cheap enough to attract investors’ attention?

The energy transition is gaining momentum: the European Union, China and the US respectively seek climate neutrality by 2050, carbon neutrality by 2050 and a return to the Paris Agreement this year. Long-term oil and coal demand are set to decline 40% and 20% by 2040 amid a projected increase in renewables-sourced electricity and adoption of electric vehicles. Investors stand to profit by landing on the right side of change.

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