Wellesley WeeklyWatch – Markets navigate the fog of Brexit uncertainty

16 December 2020

Stock Take

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.

Hopes pinned

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.

Money talks

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”.

Wealth Check

Give the gift of stock this Christmas

According to new research commissioned by St. James’s Place, Father Christmas might come down the chimney laden with gifts, but some of the money parents splash out on their children’s presents ends up going down the drain.1 As much as one fifth of gifts to children is predicted to go to waste this Christmas – the equivalent of £760 million worth of presents that are unused, unwanted or thrown away across the UK each year.2

It will come as no great surprise, then, that almost 40% of parents are therefore planning to give their children a somewhat more perpetual present.3 A contribution to a Junior ISA or a child’s pension is certainly one example of a gift that can keep on giving.

An annual contribution of £365 to a JISA – equivalent to just £1 a day – invested every year from birth could amount to £11,000 on a child’s 18th birthday. Or saving £5.50 every day from birth until your child turns 10 years old (and assuming a 5% growth rate) could produce a pension pot that is worth £1 million by the time they turn 65.

Of course, these are purely examples, and cannot be guaranteed for everyone because your return will all depend on how the chosen investment grows and its tax treatment – in other words, you might make a gain or loss on this.

As well as feeling cheered that their money is not destined for the drain, parents and grandparents will realise that this investment can have a tangible impact when the child becomes an adult. For example, a contribution to a Junior ISA could mean a child will then be in a position to put down the deposit on their first home or pay their university tuition fees.

Not only that, but the environment will benefit too, as financial gifts mean an entirely unwanted present, from the item itself through to the wrapping, doesn’t end up in landfill.

Yet a financial gift doesn’t have to mean doing away with the traditional joys of festive offerings.

“By investing some money for their future selves, whilst focusing on the toys they really want, children can get a head start in life and still feel the joy of receiving,” comments Rob Gardner, Director of Investments at St. James’s Place.

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

Investment in a Junior Stocks & Shares ISA will not provide the security of capital associated with a Junior Cash ISA.

The favourable tax treatment of Junior ISAs may not be maintained in the future and is subject to changes in legislation.

1Opinium Research, Nov 2020, survey of over 1,000 parents with children under the age of 18

2Opinium Research, Nov 2020, survey of over 1,000 parents with children under the age of 18

3Opinium Research, Nov 2020

In the Picture

Each one of the 39 external managers who manage the range of St. James’s Place funds are now part of a group of signatories of the UN-supported Principles for Responsible Investment (PRI). This group endorses asset owners and managers to use responsible investment in order to better manage risks and seek opportunities, in the quest for long-term value in sustainable markets. This is great progress, as it helps to ensure that our investments go towards shaping a future that protects the world we inherited, as opposed to endangering it.

The Last Word

“Thinking differently about how money is spent on gifts for children this year can make a big difference. A small change this Christmas and throughout their childhood could be the difference between a playhouse today or a home of their own tomorrow.”

– Rob Gardner, Director of Investments, St. James’s Place

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

BlueBay Asset Management and Columbia Threadneedle 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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