Wellesley WeeklyWatch – Markets remain optimistic for 2021, while ski season hangs in the balance

1 December 2020

Stock Take

Vaccine news boosts November stats

As we enter the final month of the year, it looks as though November 2020 will be the best month ever on markets – the US Dow Jones hit a record high last week and the MSCI World index of developed and emerging markets also surged. The main drivers were the prospect of several new COVID-19 vaccines and the election of Joe Biden as the 46th President of the United States.

Johanna Kyrklund from Schroders, Manager of the St. James’s Place Managed Growth fund, commented:

“The range of potential outcomes of COVID-19 has reduced dramatically and that is very significant for the market.”

Markets also responded well to Biden’s appointment of Janet Yellen as US Treasury secretary last week, and Donald Trump finally admitted that he would leave the White House if the Electoral College voted him out, reassuring politicians and investors that there will be a peaceful transition of power in January.

Time for a fresh start?

Indeed, fund managers think that market optimism will be here long into the New Year, as major economies slowly return to growth. Chris Iggo from AXA Investment Managers noted:

“I have always been amused by the advice to never forecast anything, let alone the future. However, today I feel pretty confident that portfolios should be positioned for continued good performance from equity markets as we head into 2021.”

The period between now and Christmas may further encourage a positive start for markets next year. BlueBay Asset Management, Co-manager of the St. James’s Place Strategic Income fund suggested:

“We are hoping that the news events in the next few weeks – comprising European Central Bank easing, a dovish Federal Reserve, the start of vaccine deployment and an easing of European lockdown restrictions – may all be slightly risk-supportive.”

Treading carefully

Despite the positive outlook, investors should still adopt a sense of ‘cautious optimism’ when approaching the months ahead.

Kyrklund argues:

“The fact that there’s going to be some practical challenges to rolling out the vaccine means we still need stimulus to be in place and that is the critical risk as we move into 2021 – that governments remain committed to supporting people.”

Chancellor Rishi Sunak’s Spending Reviews made for uncomfortable viewing last week, as it highlighted the economic damage COVID-19 has inflicted on the UK economy and the public finances. While committing to support the country in 2021, Sunak also emphasised the need to manage the budget deficit in the years to come following forecasts from the Office for Budget Responsibility that showed a long road to recovery lies ahead. What might this mean for individual savers? This week’s Wealth Check investigates.

But fiscal consolidation must be approached carefully and managed alongside other risks, warned Capital Economics. A no-deal Brexit would set back the economic recovery and an uncooperative no-deal could have lasting implications, they suggested. But “as long as politicians don’t mess it up, we believe the economic outlook from mid-2021 is better than most think.”

Although we have entered the ‘pre-vaccine’ period, we cannot claim yet that we are in a ‘post-lockdown’ state. A revised tier system of lockdown measures in England announced last week brought renewed immediacy to the challenges faced by companies and households over the Christmas period.

A dark cloud over Black Friday

Retail companies often use big shopping events like the annual ‘Black Friday’ and ‘Cyber Monday’ weekend to boost pre-Christmas sales – and this could have been a lifeline in 2020, particularly for those that could operate online during Lockdown 2.0.

That said, ‘Black Friday’ was somewhat eclipsed by the news that Arcadia, which owns well-known high-street brands including Topshop and Dorothy Perkins, was on the verge of going into administration. Its collapse shows the scale of the challenges faced by high-street retail, as COVID-19 has wiped out demand and dramatically accelerated the shift to online shopping.

Ski resorts face an uphill battle

The hospitality industry, which cannot rely on events like ‘Black Friday’, is also expected to struggle through December. While it is likely to be bars and pubs that suffer most in Britain, ski resorts across Europe are about to enter another season with COVID-19 restrictions in place. Some European leaders want a blanket closure of resorts to prevent a rise in coronavirus cases, while others argue that closing them at this time of the year would be catastrophic for regional economies in the Alpines, which rely on the ski sector for revenue.

It can be difficult to relate to the optimism that is visible in global markets when the festive period is approaching and COVID-19 restrictions are still in place. But vaccine developments are still underway, reminding us that the light at the end of the tunnel is still shining.

Johanna Kyrkland concludes:

“We need to remember that it’s easy to get quite gloomy sat here in the UK as we lurch from tier to tier and lockdown to lockdown. But actually, the picture in Asia is very different. China has come out of this very well…so in some senses, there are parts of the world that are already firmly on the road to recovery, and I think that’s the ultimate direction for us as well.”

Wealth Check

Tax rises were conspicuous by their absence from Rishi Sunak’s Spending Review statement last week. Having already paid out billions to help the country through coronavirus, it’s surely only a matter of when, not whether, taxes begin to increase, as the Chancellor explores ways the government can recoup some of that cost.

The Institute for Fiscal Studies estimates the government needs to find £40 billion a year in spending cuts and tax rises by the middle of the decade to restore balance to the nation’s finances.

The spring Budget is likely to see the first of these announcements, adding extra impetus to taking advantage of the reliefs and allowances before the inevitable ‘tinkering’ starts. Increases to Capital Gains Tax remain a focus of speculation, underlining the importance of making appropriate use of pension and ISA wrappers to shelter funds from any further tax on gains.

Another consequence of the pandemic has been a surge in cash savings in personal bank accounts to £1,925.2 billion, up £200 billion from this time last year.1 Will the run-up to the end of the tax year see savers use their ISA allowance to park cash, or to invest for the longer term in assets with the potential to generate tax-free capital gains?

At the current average easy access rate of 0.22%,2 a basic-rate taxpayer can get all their interest tax-free on cash savings of up to £454,000 held in a standard account. It’s a staggering figure, and an academic one for most of us, but it does highlight whether your valuable ISA allowance should be a home for your cash this year.

Of course, when interest rates rise that figure will reduce, whereas all interest from a Cash ISA will always be tax-free. But as things stand, a substantial rise in interest rates feels a long way off.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.

An investment in equities (funds) does not provide the security of capital associated with a Cash ISA or a deposit account with a bank or building society.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

Sources:

1 Bank of England, October 2020
2 Moneyfacts, November 2020

The Last Word

“Poverty is bad, it’s difficult, I knew it well. You want lots of things and all you can do is dream about them. It would be nice if there were more justice – if those who have a lot had a little less, and those who have a little had a little more.”

– World renowned Argentinian footballer Diego Maradona, who passed away last week

The information contained is correct as at the date of the article.

AXA, BlueBay and Schroders are fund managers for St. James’s Place.

The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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