UK And European Equities Close In On Best Ever Month

U.K. and European equities are on the brink of posting their biggest ever monthly gains, powered by vaccine breakthroughs and hopes Joe Biden’s U.S. presidential election victory will usher in a period of political and economic calm.

The U.K.’s FTSE 100 is up 14.7% through November, after edging up 0.42% at 9:25am this morning, and is on track to surpass the 14.4% previous record set in January 1989.

Europe’s Stoxx 600 index is also on for its best-ever month, with today’s 0.14% rise pushing it through 15% for the month.

Fiona Cincotta, analyst at Gain Capital GCAP , described the rally as “phenomenal”, as “vaccine optimism has driven risk appetite and stock markets higher across November”.

The MSCI World index is also on track for one of its best-ever months, up 13.4%, despite heavy falls in Asia this morning. The benchmark set a series of new all-time highs throughout the month.

The successful development of vaccines by Pfizer-BioNTech, Moderna and AstraZeneca has led investors to pile back into risk assets at a record pace. News last week that Biden is to nominate former Fed chair, Janet Yellen, as Treasury Secretary, and hopes of an imminent stimulus injection, have given markets fresh impetus.

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The question for investors is whether they believe the rally has further to run and how to play it.

November has been a month of big numbers for stock markets. The S&P 500, Nasdaq NDAQ and Dow Jones -breaching 30,000 for the first time- all hit fresh peaks last week. The Nasdaq is now up a staggering 34.2% since the turn of the year, with the S&P 500 rising 11.7% and the Dow a more modest 3.6%.

Despite their robust gains this month, the EuroStoxx 600 index remains down 6.3% this month, while the FTSE 100 is still 16% below where it started the year.

Investors’ appetite for stocks was reflected in data from Bank of America BAC which showed a record $89 billion was poured into equity funds over the first three weeks of November. The switch to risk assets has seen the gold price fall by nearly 5%, despite the dollar weakening, while oil prices rose.

The most eye-catching shift has been the rotation within markets. Investors ditched large caps and technology and some of the big winners from lockdown, favouring cyclical and mid and small-cap names that had been lagging during the recovery.

In the U.K., budget airline EasyJet’s shares soared by 60.3% in November on the vaccine announcements, despite posting its first loss in 25 years earlier in the month. Carnival, the cruise ship operator, jumped 59.6%, Pub chain JD Wetherspoon gained 34%, while food delivery business Just Eat fell 8.1%.

The vaccine has provided a backstop of sorts to the market, but risks remain, with Covid-19 infection rates still growing rapidly in much of the world. Tech’s run as undisputed leaders of the stock market looks over for now though, with returns set to be driven by a broader base of sectors.

Schroders chief investment officer Johanna Kyrklund pointed out earlier this month that “there would no longer be a need to pay a large premium for the few areas for growth if all sorts of companies return to growth as the economy recovers”.

Many will feel previously unloved cyclical or value names have further to run to catch up to the growth stocks that had been leading the way. However, investors should be wary of getting too gung ho because at some point markets will want to see more concrete signs of economic recovery to justify valuations.

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