Posted on Dec. 2020 at 10:10Updated Dec. 2020 at 15:47
You had to have a good heart to invest in the stock market in 2020. The CAC 40 has experienced a roller coaster, falling more than 2,000 points in just a few weeks before rising almost as much in the following months. Finally, the CAC 40 ended the year down 7.14%, its fourth decline in ten years. In view of the economic consequences of the health crisis, this fall is relatively limited. In 2018, the flagship index of the Paris Bourse had lost more than 10%.
The year had however started in a blessed ignorance of the tragedy which was brewing in the Chinese metropolis of Wuhan, where the first cases of a mysterious respiratory disease were announced. At the end of February, the CAC 40 reached 6.111 points, a level exceeded only twice in the past, during the Internet bubble and just before the outbreak of the “subprime” crisis. The fall was only harder.
An unprecedented crisis
No one could have predicted such a turbulent year in the markets. And for good reason, it is difficult to anticipate that a pandemic will bring the global economy to a halt in a few weeks. The scale of the health and economic disaster imposed itself on investors from the end of February. The images of overwhelmed hospitals and depopulated city centers marked the spirits. The equity markets have collapsed. Between February 19 and March 18, the ACC lost 2,356 points, a drop of more than 38%. It even dropped 17.21% in March alone, with all 40 index stocks in the red, its worst monthly performance, with the exception of September 2002 when the bubble burst. Internet.
The speed of the rebound was just as spectacular. Even before the end of March, the CAC 40 recovered by more than 20% from its low point, which corresponds to the usual definition to mark the end of a bearish cycle. The stock market nevertheless made the Yo-Yo: it fell 12% in one session on March 13, before rebounding more than 8% on March 24. The CAC 40 volatility index, the VCAC, exceeded 80 points in the same month, an unprecedented level.
Equally busy was the end of the year, but on the rise this time around. In November, the CAC 40 recorded its strongest monthly increase in the last three decades, 20%, driven by first announcements on the effectiveness of vaccines against Covid. As a result, if at the end of the third quarter, only 10 companies in the index had posted a positive performance since the start of the year, they were 19 on December 31.
Central banks to the rescue
It is no coincidence that the Paris Bourse hit its low point on March 18. That evening, the European Central Bank (ECB) intervened urgently to announce a “pandemic emergency purchasing program”, the famous PEPP. The American Federal Reserve, the Bank of Japan and the Bank of England have also been in the process. The objective: to prevent this primarily health and economic crisis from turning into a financial crisis.
The worst has been avoided. The markets recovered, financing conditions relaxed for companies. In total, the major central banks have injected more than 6.5 trillion dollars into the bond markets, enough to bring rates to their historic lows and push investors looking for yield in equities. Strong support, which should remain necessary for a long time to maintain valuations that have become dizzying. “Support from central banks has become a structural element of the market”, emphasizes Wilfrid Galand, from Montpensier.
Another key factor in the market rebound: the ambitious stimulus plans announced by the public authorities, starting with the first coordinated plan of 750 billion euros at European level, financed by joint loans. “This is the first time in years that European governments will all spend more,” said the economist.
The hegemony of luxury
The coronavirus crisis has not upset the hierarchy of the most sought-after securities on the stock market. On the contrary, it has rather accelerated the trend. The most prominent sectors in recent years have continued to dominate the rating, starting with luxury and tech. Hermès posted the best performance of the CAC (+ 32%), ahead of Schneider Electric (+ 29%), STMicroelectronics (+ 26%), Worldline (+ 25%) and Teleperformance (+ 24%). The luxury giants also ended the year up, whether LVMH (+ 23%), L’Oréal (+ 17%) or Kering (+ 1.5%). With Hermès, their weight in the index now exceeds 33%, against 27% at the start of the year.
“In general, so-called growth stocks have been particularly sought after. With persistently low interest rates, investors are willing to pay a high price for their future profits ”, emphasizes the management company Mansartis. But this trend has mainly benefited the American stock markets, which have several behemoths such as Apple and Amazon, both up by around 80%. Apple’s market capitalization, at nearly $ 2.3 trillion, blithely exceeds that of the CAC 40.
Europe lagging behind
While Wall Street has returned to its highest levels, stock market Europe still suffers the blow from the Covid. Only the DAX managed to exceed its pre-crisis level among the major European stock exchanges, even breaking an all-time high in session last week. In addition to the CAC 40, the STOXX 600 is down 5%, while London and Madrid show drops of around 15%. A delay linked in part to the sectoral composition of European indices: fewer technology companies but more representatives of the “old economy”. Weakened by the fall in oil prices, Total notably fell by 28% this year.
Developments in European indices have partly made it possible to limit this delay. The CAC in particular saw the weight of the technology sector increase thanks to the arrival of Teleperformance and Worldline in the index, replacing Sodexo and TechnipFMC. At the end of the year, Accor was replaced by Alstom.
A weak banking sector
The weight of the financial sector has also worked against Europe, the attractiveness of the latter being hampered by the restrictions imposed by the ECB in terms of dividends. The three CAC 40 banks were among the worst performances of the index, from -18.4% for BNP Paribas to -45% for Société Générale.
The banking sector is likely to remain under pressure in the future. “It is difficult to anticipate a lasting outperformance of banking stocks without an increase in their interest margin”, underlines Christian Parisot at Aurel BGC, which seems unlikely as long as central banks keep bond yields at the bottom.
After the euphoria, investors doubt
The year ended with a bang on the markets. The CAC 40 jumped almost 16% in the last quarter, one of its best performances of the decade. The optimism reflected by the stock markets, however, makes some professionals uncomfortable. “Confidence in a fairly near future where the epidemic would be conquered, and massive support for economic policy, remain strong drivers for risk taking”, emphasizes Sebastian Paris Horvitz of La Banque Postale AM. But this rosy scenario is far from certain, starting with the tight schedule of vaccination campaigns. “Moving forward into 2021, the biggest risk for the market, considering all the good news already in the prices, is perhaps its own euphoria in drawing an overly promising future”, warns the economist.
The comeback of small and mid caps
After two consecutive years of underperformance, the CAC Mid & Small beat its big brother in 2020: it ended the year down 1.3%. The market welcomes more young companies from popular sectors such as renewable energies, software or even biotechs. They are also less internationalized companies, and which have everything to gain from a coordinated fiscal stimulus at European level. The trend could therefore continue in the future.