Wellesley WeeklyWatch – Public disbelief at frantic changes to festive plans

22 December 2020

Stock Take

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”.

Wealth Check

Last week saw the Wealth Tax Commission’s report in the news, after it declared that a one-off, 5% levy on assets could raise £260 billion over a five-year period, therefore plugging the gap in the public finances as caused by COVID-19.

“This is a striking conclusion and comes at a critical juncture,” argued Lord Gus O’Donnell in the paper’s foreword.

Chancellor Rishi Sunak nevertheless maintained his reluctance last week to consider such a one-off wealth tax when balancing the books in the new year and beyond. Negative real interest rates dictate that government borrowing is feasible in the medium term, and therefore such a drastic measure to restore the public finances in haste would not be needed.

From a political point of view, it would also prove to be unpopular, especially as the commission’s proposal for the levy to be applied to individuals’ personal wealth over £500,000 targets middle-earners as well as high-earners, plus those who are asset rich but cash poor. Around 17% of the adult population would feel the impact, with the tax being paid in equal instalments over five years.2

Mr Sunak has made it quite clear that taxes will need to be hiked. The question, however, is where?

“This proposal could ease the path for increases to existing taxes on capital, such as Capital Gains Tax and Inheritance Tax,” suggested Alexandra Loydon, Private Client Director for St. James’s Place. “The chancellor may not like the idea of a wealth tax, but it could give him the political cover to introduce alternatives, particularly IHT and CGT on which he has already commissioned reviews.”

Such tax reforms would present further challenges, which is reminiscent of a saying, attributed to Winston Churchill, that a country taxing itself out of a recession “is like a man standing in a bucket and trying to lift himself up by the handle”.

“This uncertainty underlines the importance of advice, and how it can add value to your wealth by ensuring the appropriate use of current tax breaks, especially with the end of the tax year and a March Budget nearing,” adds Loydon.

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

1,2 Wealth Tax Commission, A wealth tax for the UK, December 2020

In the Picture

It appears that UK stock prices are undervalued, given the number that are trading at low price-to-earnings ratios. The below chart reveals that, earlier in 2020, the number of UK businesses whose share price was less than 10 times their earnings was at its peak level since the global financial crisis.

The Last Word

“What good is the warmth of summer, without the cold of winter to give it sweetness.”

– John Steinbeck, American author and Nobel Prize in Literature winner.

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

AXA Investment Managers and Schroders 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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