13 October 2020
Last week, President Trump was helicoptered back to the White House after being discharged from hospital on Monday. His positive COVID-19 diagnosis was followed by just a few days in hospital before returning to work – a decision that has attracted criticism for being potentially still contagious while doing so. It’s not really possible to determine what the impact has been, or will be, on the election result but there were signs that Joe Biden was pulling ahead as the week ended.
FiveThirtyEight, a poll aggregator has put Biden’s chances at more than 86%, and many observers are now predicting him as a firm favourite to win the White House. The probability of a ‘clean sweep’ (in which Democrats win both houses of Congress) has also increased; some are putting the likelihood at more than 60%.
The prospect of a Biden victory hasn’t made the markets too downbeat, despite his promise to increase taxes. This is partly because he’s also committed to a meatier set of coronavirus relief measures than the current president, suggests Mark Dowding of BlueBay Asset Management, co-manager of the St. James’s Place Strategic Income fund.
“Ordinarily, the threat of a Democratic ‘blue wave’ might weigh on risk appetite, but we don’t feel this is evident in 2020. When Trump was elected in 2016, it is estimated that the implied policy shifts relative to Obama lifted stocks by approximately 10% thanks to the promise of lower taxes. Consequently, the threat of higher taxes under Biden might usually be extrapolated to suggest a 10% reversal; however, in the shorter to intermediate term, the fear of higher taxes to come is being offset by the promise of higher government spending in the year ahead.”
The Washington stalemate surrounding the next set of economic stimulus measures has dragged the markets down recently; despite both parties agreeing on a need for further measures, and despite pressure from leading figures such as the chair of the Federal Reserve, a deal still hasn’t been agreed. As hopes of a deal rose and fell last week, so did the US stock market.
UK closing in on resolution to Brexit
Figures in the UK meanwhile, showed that the economy grew less than expected in August. GDP only increased from 2.1% from July, leading to fears that the economic recovery is slowing down. “The government must stand ready to help firms navigate a difficult winter,” urged Suren Thiru, Head of Economics at the British Chambers of Commerce.
Rishi Sunak is in a difficult position now. Although beginning the week with a pledge to “balance the books” during his speech to Conservative Party members and stressing the need to control national debt and spending, he then announced on Friday a new local furlough scheme for workers in pubs, restaurants and other venues likely to face closure in the future.
According to press reports, last week’s Brexit trade talks have focused onto what looks like the final sticking point: fisheries. Negotiators are trying to reach a compromise ahead of a summit in Brussels this week and while it’s not done yet, there is renewed faith that a deal is possible. Though it’s no secret that the political turmoil since the referendum result has made investors cautious about the UK, when viewed from a long-term perspective, it’s important to look beyond the headlines and focus on the fundamentals.
“I look at a lot of these headwinds for the UK and believe that a lot of them have the potential to abate over the next 12-18 months,” suggested Nick Kirrage from Schroders, manager of the St. James’s Place Managed Growth fund.
He adds: “People could perhaps look at some of these [UK] businesses, and the market itself, and ask if there is actually anything particularly structurally broken about the UK market, about business generation, about GDP growth, that means that it can’t do a bit better than it has? And I don’t see those impediments. So, I actually think that there’s a very, very low expectation bar built into the UK at the moment. And low expectations, and low valuations, we like.”
China reopens markets
Finally, after a holiday, China’s markets reopened last week. The country’s currency, the renminbi, rose against the dollar and its CSI 300 Index of stocks in Shanghai and Shenzhen closed higher on Friday. While the rest of the world still presents a mixed picture, China has managed to control the spread of COVID-19 quite well and has also enjoyed a better economic recovery than most.