Our Insights

Foresight from the frontier.

January 13, 2021
  • Europe’s lagging vaccine rollout raises recovery concerns
  • Value stocks’ dramatic losing streak since 2006

Many European governments won plaudits last year for their relatively quick and decisive use of lockdowns to manage the spread of the virus – at least compared with the shambolic pandemic responses seen across the water in the United States and United Kingdom. Yet as we enter 2021, the tables appear to have turned. EU countries are lagging far behind the US and UK in their roll-out of vaccinations. Going forward, a lethargic vaccine roll-out could have significant ramifications for economic activity.

But the lagging nature of data provision means it may be some months before we see any evidence of a performance differential. The latest available data from November remains positive, especially for Germany and its manufacturing sector. Looking in the rear-view mirror, Europe’s fourth quarter activity appears resilient, with export orders relatively strong especially within the eurozone. As the latest lockdown restrictions and Europe’s slow roll-out of vaccines filter through the data, that curve could flatten.

For the UK, on the other hand, the picture could be reversed. Household consumption in the third quarter of 2020 was much lower than on the continent. The reasons can likely be found in differing focuses of fiscal support. While eurozone countries were more active in VAT rate cuts, UK policymakers prioritized financial aid to households –resulting in an increased saving rate of 17% compared with 13% in the EU. The UK economy’s heavy tilt towards services rather than manufacturing (as inFrance and Germany) will not have helped either, with more workers heeding government advice and staying home to work and saving their lunch money.

The UK’s rapid vaccine roll-out stands in stark contrast to their initial bumbling response to the pandemic last year. Combined with UK workers’ high-savings rate last year, the vaccination programme could augur well for a stronger bounce-back this year than their European counterparts.

In 2020, the relative underperformance of value stocks when compared with growth stocks was well documented during the year, both in the media and this very newsletter. At the close of the year, the performance gap was a striking 36%. But our Chart of the Week going back to the start of the 1990s shows this phenomenon to be part of a much longer trend. Since August 2006, value has underperformed growth by a whopping 345 percentage points (6.4% annualized). Ominously, the relative performance levels are now at levels last seen during the tech bubble at the turn of the century.

Will 2021 be the year that value makes a comeback? Well, the valuation spread between cheap and expensive stocks stands at 1.5 standard deviations above its mean, reflecting higher premiums offered by value stocks, and often associated with subsequent outperformance. But another typical sign of good news for value overgrowth– inflation – is unlikely to seriously return in the coming year, despite an expected uptick in prices year-on-year during the second quarter.

Inflationary pressures building up in China

China’s Consumer Price Index ticked up 1.1 in Dec year-on-year, largely driven by higher food prices arising from inventory issues in China’s pork industry. However, with those issues being solved, we can expect food prices –and with it, pressures on China’s CPI inflation – to abate. Services inflation remains stable at 0.3%, but is expected to rise gradually to 2%. Wage inflation, meanwhile, has bounced back strongly since April. Overall, with China’s Producer Price Index expected to pick up, inflationary pressures should be good news in the aggregate for profit margins at the corporate level.

US job markets losing momentum

After a strong rebound in the second half of last year, the US job market is on the wane. December payrolls fell by 104,000— well below the consensus of a 50,000 increase in jobs. Clearly, Covid restrictions and lockdown are taking their toll on economic activity. The unemployment rate remains unchanged at 6.7%, below consensus for the 10th month running.  Unsurprisingly, leisure and hospitality sectors are suffering most, with 500,000 jobs lost last month, and these losses were only partially counterbalanced by job increases in retail, construction and manufacturing.

  • 20 Jan: UK CPI inflation fell unexpectedly in November, with little indication of a significant change for December’s figures.
  • 22 Jan: German Manufacturing PMI figures for December will give in an indication of how resilient the sector will prove through a new wave of lockdowns.

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