16 December 2020
Progress, not perfection
UK Prime Minister Boris Johnson and European Commission President Ursula von der Leyen would appear to be making tentative progress on Brexit, following a joint – but brief – statement on Sunday 13th December, explaining: “Despite the fact that deadlines have been missed over and over, we think it is responsible at this point to go the extra mile.” As yet, no further clarification has been released, including when these extended discussions might conclude – press reports suggest that the culmination could be Christmas.
The ongoing uncertainty surrounding Brexit had a ripple effect on markets last week, as seen in that the value of sterling took a nose dive and, with Britain looking to be on course for a no-deal Brexit, the pound fell by approximately 2% against the dollar at the tail end of the week. A momentarily weaker pound won’t necessarily be problematic for those investing in large UK companies, though, because many of the largest companies earn much of their revenue overseas. In early trading on Monday this week, the pound had changed direction and climbed again.
Chris Ralph, Chief Global Strategist at St. James’s Place, explains that sterling is bound to be at risk due to these continued talks, but that trade negotiations would have to end messily, with major opposition, in order for the pound to end up plunging as it did earlier this year.
Many banks and fund managers still maintain that a trade agreement is the ideal scenario and, indeed, investors still positively expect a deal to be the eventual outcome. That said, they are fully aware – and wary – of the disruption that failing to reach an agreement would cause. Capital Economics notes that a lot of the market impact has already been priced in by investors, given the lack of distance between no-deal and deal caused by decisions taken in the last couple of years.
In the current climate, however, COVID-19 continues to be the major driver of markets by far, and that won’t change, even in a no-deal scenario, states Mark Dowding of BlueBay Asset Management, co-manager of the St. James’s Place Strategic Income fund.
“The economic impact coming from this outcome is likely to still pale into insignificance compared to the result of the coronavirus,” he adds further.
As for how the future performance of UK equities might play out, it’s wise to bear in mind that, by many metrics, UK companies appear to be undervalued. Richard Colwell of Columbia Threadneedle – manager of the St. James’s Place Strategic Managed fund – considers that UK equities are on the brink of bouncing back. He says: “On many measures, the UK market is as cheap as it’s been since the ‘70s.”
He argues that the UK is full of quality companies, the value of which are actually higher than current prices, and therefore the country is undervalued compared to other equity markets. By way of example, the fact that events such as September’s purchase of William Hill by US gambling giant Caesars Entertainment took place amidst the COVID-19 pandemic, and with Brexit trade negotiations still ongoing, proves that even during uncertain times, investors will still be drawn to quality businesses.
Colwell goes on to say: “There are prize assets available because we, the investment community, continue to be too timid and too bearish on the intrinsic value of UK stocks.”
Forces to be reckoned with
With Brexit rife in last week’s headlines, markets were likewise responding to the same forces that have been driving them during the majority of 2020 – vaccine developments, COVID-19 cases and economic data all had consequences for risk assets last week.
There was a mix of news in the United States, with jobs data and COVID-19 case numbers signalling the continued damage caused by the coronavirus. On the other hand, an economic stimulus package being agreed in the near term looked to be more promising.
US COVID-19 case numbers averaged out at 210,000 new confirmed cases per day last week, clearly demonstrating that even the world’s largest economy has a long journey ahead in the battle against the pandemic. On a more positive note, however, the rate of increase seemed to be on the decline by the end of the week.
Nevertheless, the White House made a new fiscal stimulus offer to the Democrats on Wednesday, buoying hopes that the critical funds will help to boost economic recovery. For some months, both sides have agreed that more stimulus is needed, but have unfortunately reached a stalemate regarding its size and some of the conditions they want attached.
In other news, the European Central Bank (ECB) declared that it will extend its bond-buying programme by another nine months, plus an additional €500 billion. The reaction from the markets was fairly subdued as the announcement was merely in line with investor expectations. The ECB programme is just one of a series of similar measures taken by global central banks that have been essential to assisting markets following the emergence of the virus in March this year.
Everyone likes a happy ending, and last week saw a breakthrough in the bid to control COVID-19, when a UK grandmother became the first person to receive the Pfizer/BioNTech vaccine. Margaret Keenan, who will celebrate her 91st birthday this week, declared that the jab was the “best early birthday present”.