Performance, January 2021
Focus on US politics in January
Focus in January was on US politics after protesters stormed the Capitol early in the year. The Capitol Police was completely unprepared, and four people died from the event. The horde of protesters was encouraged by the now former US President Donald Trump, and this has led the House of Representatives to impeach Donald Trump. But a conviction requires a two-thirds majority in the Senate where Republicans and Democrats each hold 50 seats. Political analysts therefore see it as unrealistic that the impeachment trial will lead to a conviction. The transition of power on 20 January was orderly - thanks to the police turning out in force and Donald Trump not attending the inauguration ceremony. As promised, the new president, Joe Biden, used his first days in office to revoke a number of decisions made by Donald Trump, including for the US to rejoin the Paris Agreement and WHO. In addition, the economy will be supported by Biden’s new aid package and by the newly appointed US Secretary of the Treasury, the former chair of the Federal Reserve, Janet Yellen. Her focus is on saving the economy, and she will address the debt problems at a later stage.
Corona pandemic has firm grip on Europe
The European economies are weak - and at the same time Europe is lagging behind the rest of the industrialised world when it comes to vaccinations against the coronavirus. This gives rise to concern about further delay of the plans to reopen the European economies. The situation was clearly reflected in the latest, forward-looking sentiment indicators - where Europe’s numbers do not have the same positive momentum as in the US. This was especially clear in the data for the service industries, which are hit hard by the lockdowns. The same was the case for consumer confidence - for instance in Germany where the numbers pointed to a sharp fall in January. GDP looks set to fall by 7.2% in Europe in 2020, but only by 3.4% in the US. The UK is particularly hard hit by a very contagious mutation of the coronavirus coupled with Brexit, and this is clearly reflected in data for the British economy, which is expected to shrink by no less than 10% in 2020.
Unusual arm-wrestling on US equity market
The US equity market was the scene of unusual arm-wrestling in January. A group of private investors attacked several hedge funds, which specialise in shorting equities, i.e. betting that the value of a particular share will go down. Hedge funds typically borrow a particular share from other investors to sell the share in the market in the hope that the share price will fall, and when the share price falls, the hedge fund buys the share back at the lower price, returns the borrowed shares and pockets a profit. In this round of arm-wrestling a group of private investors successfully pushed up the price of a particularly share, which was heavily shorted by hedge funds. When such a situation arises, the hedge funds will typically be asked to repay their debt to limit the losses. The hedge funds were therefore forced to buy back the shares that they had sold, and this scramble to forestall losses only adds to the losses of the hedge funds – this is also known as a ”short-squeeze”. After the duel with private investors, one of the best known hedge funds in the area has announced an end to its concept of selling shares it does not own - all the while the trading platforms have attempted to contain the undesirable and destabilising speculation in companies listed on the platforms.
The optimism, which has dominated the global equity markets since the spring, continued into January. However, towards the end of the month vaccine optimism turned into fears of, e.g., more contagious mutations, which may result in further and extended restrictions - and delayed vaccines. Yet, the fears were partly offset by earnings reports which generally surprised to the upside of what financial analysts had feared due to the coronavirus challenges. In the US, analysts restated that earnings will be higher in 2021 than in 2019, and the ground lost during the crises will therefore be more than recovered by the end of 2021. The US and China are in a strong position in this respect, while Europe is in a weaker position.
On the Danish bond market, the year started out with slightly rising yields. By the end of the month, the deadline to give notice to terminate a loan on the April payment expired. The extraordinary terminations were largely as expected. However, Realkredit Danmark took the market by surprise once again through a very aggressive refinancing behaviour - not least in the 20-year segment. Bond returns were mixed in January. ‘Flex loan bonds’ generally yielded returns close to 0 – regardless of maturity. For callable bonds, the long-term low-yielding segment delivered negative returns, while the high-yielding bonds typically delivered positive returns.
The rising US Treasury yields spoiled an otherwise positive trend on the emerging markets from late 2020. With unchanged credit spreads, emerging-market external and local debt delivered negative returns. A rising oil price and rising commodity prices were generally supportive of the asset class, while Covid-19 and the absence of tourists still weighed on many of the countries where tourist income accounts for a large part of the economy. Some of the struggling countries have had to increase their budget deficits and thereby their debt, which has questioned the countries’ debt servicing ability. The IMF is assisting the countries in addressing the issue. Most recently, Ethiopia has approached its creditors to negotiate a debt reduction. This comes on top of a number of smaller countries entering debt talks in late 2020. However, the asset class is still in demand, since the alternatives on the developed markets are negative or very low.
Credit spreads were stable throughout January - both in investment grade and high yield. The negative Covid-19 news and a high volume of new issuances were offset by the ECB's asset purchases and additional investor purchases in the asset class. The oil price rose, and therefore bonds from the energy companies generally performed well, while companies with direct exposure to Covid-19 lockdowns generally performed poorly, e.g. airports and airlines.