Ramblings of a Wealth Manager – 18th November 2020

You spin me, right round baby, right round

Another week and some more positive news on a potential COVID vaccine. Most importantly this is good news for the potential of a long term return to normal (fingers crossed for a Christmas with family too!). For equity markets what it means is that the sectors that investors had almost shunned completely due to COVID are now in demand. Banks, travel and leisure, oil & gas, consumer discretionary and other economically sensitive sectors (termed cyclicals) have rallied strongly whilst technology, consumer staples and healthcare (termed defensives) have lagged.

Over the medium term, the cyclical sectors have massively underperformed but by taking a few individual share price graphs you can see the theme that has emerged since the first vaccine announcement last week. A strong short term bounce but still well off medium-term highs.

The opposite is reflected in the share prices of defensive sector stocks. Short term underperformance but still near all time share price highs.

What happens next?

Defensives have outperformed cyclicals by such a huge margin that there is scope for the rotation to cyclicals to continue particularly if there is more good vaccine news. That being said the companies that have done well since COVID such the technology leaders still look well placed to deliver growth over the long term whilst sectors such as oil look structurally challenged.

Investor positioning was extreme and this can lead to some big rotations but we would not be looking to abandon our preferred companies in defensive sectors just to chase what could easily be a short term market rotation

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