With a surge in global market stocks and equities during December, many businesses and investors began raising money in the financial markets that pulled many developed economies into their own positive arena for the year till date. This made December a turning point for the countries globally. There was a complete change in the performance of equity markets with the year’s biggest losers such as MSCI Europe ex-UK and FTSE All-Share indices returning to 14.2% and 12.7% respectively and emerging as the top gainers. Some of the star performers like Asia’s ex-Japan and the US who were outperforming in the market from the beginning of 2020, recorded monthly gains of 8.0% and 11.0% respectively in November (Morgan, 2020). The global value stocks stood at 15.1% thereby outperforming the growth, which stood at 10.9%. The high yields to the equities and emerging markets further dominated the superior quality markets.
Factors shaping the market trends
The trends in the equity markets are influenced by several factors that shape the decision of an investor of whether or not to invest their money in the alternate forms like equities, bonds or securities. These factors are helpful in providing insights into how future trends may occur. Some of the factors are explained below:
• Government – Government plays a key role in shaping the market trends by means of altering the interest rates and the availability of dollars. The change is accompanied by the increase or decrease in investment flows into and out of the country which in turn causes a profound impact on the financial marketplace.
• International Transactions – The funds that flow between the countries directly affect the currency and economy of the country. The money that flows into the economy due to the fact that the countries indulge in exporting more products and services can be further reinvested that can stimulate the equities and financial markets in the respective countries.
• Speculation and Expectation – Speculation and expectations form the basis of shaping the decision of the investor regarding the time when the money needs to be invested in financial markets. Every economic agent like consumers, businessmen, investors and politicians have different views when it comes to foreseeing the direction in which the economy will move in the future. They speculate various expectations about the future trends in the markets which depend on current acts. The technique which is employed to analyse the perceptions and feelings of individuals about the current state of the economy is called sentiment indicators. These indicators along with the other forms of analysis like fundamental and technical analysis give insights into the market by creating a bias of future prices and trend direction.
• Supply & Demand – The dynamics in prices are affected by the market forces such as supply and demand for various products, currencies and other investments. In financial markets, the stocks fluctuate in the short and long run, thus causing trends. Buyers will buy the stocks and assets at higher prices if the supply is eroding at the current prices which creates large price increases. On the contrary, there will be downward movement in the prices due to the entry of a large number of sellers which would increase the stock available in the market. This process takes place on all time frames.
All the above-mentioned factors closely affect one another as they are closely linked. Government mandates like news releases, change in tax policy, the Fed decided to maintain the interest rate affect international transactions which further causes fluctuations in international transactions and thus in the financial markets.
Changing the dynamics of the Global Financial Market during the COVID-19 pandemic
The above figure showcases the returns to some of the major stocks in the world financial countries. When the number of COVID-19 cases was increasing at a faster rate, markets reacted to the announcements made by several pharmaceutical companies like BioNTech, Moderna and AstraZeneca on the release of vaccines that proved to be efficient in reducing the causes of COVID-19. The next major step was to ensure the quick and equitable manufacturing, distribution and administration of the vaccines on the large scale. The emerging markets are in the process of pre-ordering the AstraZeneca/Oxford vaccines so are eagerly waiting for the approval and release of the vaccines in the market (Morgan, 2020). With the governments making continuous efforts to control the virus worldwide, the path to recovery still looks blurred. For example in Europe, there has been a significant decline in the number of new infections due to the frequent lockdown measures taken by the authorities. In the US, the situation is a bit different with the rise in new cases despite the measures taken by the government. However high-frequency data has shown that these restrictions cause a slowdown in the economy. Thus markets are believed to foresee the economic developments in terms of better times on horizon in both short as well as long run.
Following the decisions made by the governments in Europe, the UK government reintroduced measures to curb the spread of the virus. In the process, the business and households were provided with monetary help through furlough scheme. According to the forecasts made by The Office for Budget Responsibility, the government borrowing will account for about 19.4% of GDP which is an alarming figure not seen since the end of the Second World War.
The Bank of England (BoE) made announcements to increase its asset purchase facility by about British Pound Sterling (GBP) 150 million. With the equity market, the performance in December was dominated by this year’s losers, as the economy is slowly returning to normality. This in turn is followed by the continued recovery of the earnings expectations provided the support to the equities. For the investors and individuals who are thinking to diversify their portfolio beyond equities, an equitable allocation to macro funds and real assets will be helpful.
Monthly switching impacting on Global Market Indices
|EMERGING MARKETS||NOVEMBER (%)||YEAR-TO-DATE (%)|
|Hang Seng (China)||9.27||-6.56|
|Jakarta Composite (Indonesia)||9.44||-10.91|
|IPC All-Share (Mexico)||4.48||-4.05|
|ASX 200 (Australia)||9.96||-2.49|
|CAC 40 (France)||20.12||-7.69|
|Dow Jones Russia Index (Russia)||20.19||-17.23|
|FTSE 100 (United Kingdom)||12.35||-16.95|
With the optimism surrounding the global wave of COVID-19 vaccines, the MSCI-EAFE Index recorded a jump of 16.86% in December. The European Financial markets started performing much better, with higher gains in countries like France, Italy, Germany and the UK. This was achieved as the European markets focussed on the prevention of the obstacles in the path of the EU recovery package. The Asian financial system also performed better. China picked up 9.27% while India outperformed the other emerging markets with a jump of 11.45%. The markets in the Pacific region also had a good month. With Australia recording a jump of 9.96% while Japan recording one of the highest jumps of 15.04%.
The equities outperformed the bonds and currencies in the financial markets. The world equities index stood at 9.3%. There were higher returns in countries like Europe, the UK and Latin America. The emerging markets also showed satisfactory returns with 5.8%. On the other hand, the bonds and currencies registered negative returns across the countries worldwide. Individuals and investors speculated the declining growth of economies and uncertainties in the global financial markets due to COVID in the near future. Hence they preferred equities over government bonds and currencies in the hope of better returns.
While the path to COVID-19 recovery still looks blurred, there will be optimism surrounding the investors and businesses in the global financial markets. This will restore the trust of the investors who will be looking forward to the release of the vaccine so that they can accordingly shape their investment preferences. However, it becomes extremely important to analyse the growing need for financial instruments and institutions in the financial market. With the large number of capitals involved in the market, any fluctuations in these investments will have an impact on both the economics of different countries as well as on the participants of the financial global markets. Therefore the proper understanding of the management and transparency becomes essential.
Ghulam, & Diamond, N. (2016). Analysis of Financial Markets. LAUREA, VII(3), 32. 7 November
Greenwood, R., Hanson, S. G., & Jin, L. J. (2019, June 7). Reflexivity in Credit Markets. Harvard Business School, VI(2), 23. https://hbswk.hbs.edu/item/reflexivity-in-credit-markets
Jones, D. (2020, December 10). Monthly Market Insights- December 2020. Conscious Capital Wealth Management. https://www.consciouscapitalwm.com/campaigns/monthly-market-insights
Morgan, J.P. (2020, December 1). Monthly Market Review. J.P. Morgan Asset Management. https://am.jpmorgan.com/ch/en/asset-management/institutional/insights/market-insights/market-updates/monthly-market-review/
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