22 December 2020
A strained Christmas
This is the last issue of WeeklyWatch in 2020 – we’ll resume service on Tuesday 12 January. In the meantime, we hope that you and your families safely enjoy a restful break, and we wish you the very best for 2021 and beyond.
A new strain of coronavirus has rapidly spread in London and the South East during this final countdown to Christmas, resulting in renewed bewilderment for millions of people over strict Tier 4 mixing rules, plus harsher restrictions on social distancing across England, Scotland and Wales over the festive period. Many are now dealing with last-minute disruption to their Christmas plans, with some unable to meet up with their loved ones at all, until guidelines change.
On Sunday, European nations, including Ireland, Germany, France, Italy, the Netherlands and Belgium, all announced a halt to flights and travel from the UK, and France also put a stop to freight transport via the Channel Tunnel – this restriction is hoped to be eased by Wednesday. Scientific advisors have stated that the new variant is spreading more rapidly than the original variant, but it is not believed to be more deadly. The mood in European and UK equity markets on Monday morning was therefore gloomy, with shares in the travel sector especially hard hit, yet again.
Brexit stalemate continues
As for all things Brexit, trade negotiations have not made any noticeable headway at the time of writing on Tuesday morning, despite further deadline extensions. Renewed uncertainty has meant that severe trade disruption is still possible.
Headlines had us believe that a deal was closer to being finalised last week, and the pound therefore increased against the dollar; however, it then pulled back on Friday due to a failure on both sides to reach an agreement, and by early Monday morning, it had slumped further. More changes in the market are anticipated, as long as talks rumble on.
For the time-being, those investing in UK companies are reminded that UK equities are already trading at cheap valuations (see ‘In the Picture’ below) – in part due to the fog of Brexit uncertainty hovering over their share prices for some time. Indeed, trade disruption would be a challenge for many businesses, yet many of the UK’s largest companies earn a sizeable portion of their revenue overseas – in part, this protects them from the knock-on effects of a deal-or-no-deal scenario.
A force for good?
Quite aside from last week’s talks, coronavirus, and the global reaction to it, have been the biggest market drivers during 2020. There has been great governmental support across the world (i.e. stimulus packages and wage subsidy schemes) and central banks (with low interest rates and asset-purchase schemes) since COVID-19 reared its head in March. Investor optimism has thereby been boosted compared with the nose dive in share prices when the pandemic first broke out.
Hence why markets maintained a watchful eye on events in Washington last week, where Democrats and Republicans struck a fiscal stimulus deal at the weekend. After the political deadlock concluded, the anticipation that the $900 billion package would soon be agreed was a driving force behind US stocks rising to record levels again at the end of the week.
The best gift
The market mood has further been buoyed following positive news about vaccine developments, and last week was no exception, with US regulators ready to sign off Moderna’s vaccine on an emergency basis. The public rollout of the vaccine in the UK saw it reach over 130,000 people initially, with the elderly and front-line health workers first in line to receive the jabs.
“Santa this year is coming with a big syringe, and it’s the best gift we could get in this dismal 2020,” noted Gilles Moëc, Chief Economist at AXA Group. AXA Investment Managers manage the St. James’s Place Allshare Income Unit Trust. He added: “Still, the next few months will remain complicated.”
The many hurdles mean a risk of major economies ending up back in a recession because of elevated case numbers or further lockdowns. Likewise, governments might make their fiscal policies more rigorous with higher taxes, or prematurely withdraw their support measures. For some, higher inflation is a concern, as it decreases the value of cash savings.
The recent news regarding the new variant of COVID-19 understandably intensifies any doubt, with some analysts worried that the consequences might be more far-reaching around the world.
Nobody has a crystal ball to know how things will turn out. Yet investors can still feel optimistic about 2021, now we have a vaccine, says Johanna Kyrklund, Group Chief Investment Officer at Schroders and manager of the St. James’s Place Managed Growth fund. A wide economic recovery may also be a positive for the cyclical stocks that have been outperformed by large technology companies, particularly in the US.
“Overall, we’re positive on equities, because with a recovery on the horizon, we think it’s time to shift out of those stay-at-home stocks that have outperformed this year, and shift into more cyclical areas of the market.”
She went on to say that, for investors, this means that “it’s time to stop hibernating”.