Wellesley WeeklyWatch – Vaccine developments spark market hopes as we look to the new year

08 December 2020

Stock Take

GDP takes a hit

2020 is drawing to a close, and with a host of vaccine developments in recent weeks, investors are beginning to look toward the shape of economic recovery that’s expected in 2021.

The OECD published its biannual economic outlook on countries around the world last week, which predicted that the UK will suffer more economic damage from COVID-19 than any other developed country. It predicts that GPD will be 6.4% lower at the end of 2021 than it was at the end of last year. In contrast, the OECD thinks that China will be 9.7% larger, while the US will have lost only 0.1%. It’s a sombre outlook, but UK stocks still hit their highest levels since March last week.

The fortunes of various retailers, meanwhile, revealed the effects of the pandemic on the economy. An earnings boost caused by being one of the few places allowed to stay open during lockdowns allowed some of the biggest supermarkets to pay back the huge sums of business rates relief given by the government this year. ‘Non-essential’ shops however have suffered after being forced to shut – last week, 242-year-old retailer Debenhams has said it will close soon, and Topshop owner Arcadia has also gone into administration. A ray of hope for Debenhams emerged over the weekend when it came to light that Frasers Group tycoon Mike Ashley was in talks with them about a potential rescue deal.

Oil prices soar

After oil-producing countries agreed to boost supply from January next year, oil prices hit their highest level since March – something that can be interpreted as a sign of confidence in a world economic rebound in 2021. The production boost is less than previously agreed however, making this optimistic outlook one of caution too amid oil producers.

Brexit negotiations enter their final stages

At the time of writing on Monday morning, Brexit negotiations were in their final stage. With very little time to find a compromise before the UK’s transition period ends, and no agreement reached over the weekend, an announcement is likely to be made this week. If talks fall apart, the pound could drop given that markets appear to be expecting a deal. As Capital Economics notes, however, the differences between Brexit deal and no deal aren’t as big as they were given the UK’s pursuit of a fairly ‘hard’ Brexit already.

What will 2021 hold?

Forecasters are now trying to sketch the path to recovery in 2021 – no mean feat given the tumultuous year we’ve all had. Will we see a repeat of 2008’s sluggish return to normality? Or will we see quick bounce-backs for the world’s economies once the virus has been brought under control?

“This is not 2008 – it couldn’t be more different,” said Jeffrey Cleveland, Chief Economist at Payden & Rygel, Co-manager of the St. James’s Place Diversified Bond fund.

Economic recovery in 2021 may be livelier than the one that followed the 2008 financial crisis for a few reasons, according to Cleveland. Firstly, this recession has been led by the services sector, which is poised to make a comeback in 2021. There has also been far more fiscal stimulus from governments this time around, and recent data shows that consumers are spending more freely than they did after 2008, and, due to lockdowns, are also sitting on savings that they are ready to spend once they can.

US stocks reaching fresh highs last week indicate optimism among investors, but it is important to be reminded not to be swept up in it. As there’s already been a remarkable rally this year, the reality of distributing and administering vaccines may cause a market slowdown in 2021, according to Mark Dowding of BlueBay Asset Management, co-manager of the St. James’s Place Strategic Income fund.

This may in turn lower investment returns, he added:

“Looking at how far markets have travelled this year, it feels like investors have been eating a ‘substantial meal’ in 2020…maybe 2021 will resemble more of a ‘Scotch egg’.”

Just as 2020 was a lesson in the importance of investors not reacting to short term volatility, so they should also be wary of the potential for a more positive outlook. As the saying goes, markets are always climbing a wall of worry.

Wealth Check

It’s another grim consequence of the COVID-19 pandemic that the number of estates liable to pay Inheritance Tax (IHT) is projected to rise, after receipts dropped for the first time in a decade in the 2019/20 tax year.

The fall in IHT revenue to £5.2 billion last year can be attributed to the impact of the residence nil-rate band – the additional tax-free allowance available where a main residence is left to a direct descendant – introduced in 2017/18.1

 The office for Budget Responsibility has forecast a 20% increase in the number of deaths subject to IHT in this tax year2 – making matters worse for many of the families affected, these bills will be unexpected as those who have died from the virus will not have had time to plan their affairs.

To compound the problem, a Freedom of Information (FOI) request last week revealed an increase in the number of estates liable for IHT on lifetime gifts, as more people fall foul of complicated rules. The tax charged on gifts rose from £135 million in 2015/16 to £197 million in 2017/18. The number of families paying IHT on gifts has now risen for three years in a row.3

The FOI request showed an increase in tax paid on gifts made under the ‘seven-year rule’, as benefactors have died before the value of the asset has fallen outside of the estate. Many of those making lifetime gifts are unaware of the various allowances and exemptions that can help mitigate the tax burden. The news also reinforces the importance of keeping detailed records of amounts given away, in case gifts are investigated after the donor’s death.

The pandemic has provided a tragic reminder of why it is so important to ensure that our affairs, including an up-to-date Will, are in order.

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

Will writing involves the referral to a service that is separate and distinct to those offered by St. James’s Place. Wills are not regulated by the Financial Conduct Authority.

Sources:

1 HMRC, August 2020
2 Office for Budget Responsibility, November 2020
3 HMRC, December 2020

The Last Word

“It will take many months for us to vaccinate everybody who needs vaccination.”

– NHS England’s medical director, Professor Stephen Powis, warns that the COVID-19 immunisation campaign that begins this week is a marathon, not a sprint.

BlueBay Asset Management and Payden & Rygel are fund managers for St. James’s Place.

The information contained is correct as at the date of the article. 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 or Wellesley Wealth Advisory.

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