19 January 2021
Hesitation at play
After a buoyant beginning to 2021, markets across the world nevertheless lost pace last week, as they contemplated the less-than-ideal economic data in light of the pandemic.
“The past week has been characterised by a loss of momentum in financial markets, following on the back of a couple of months of healthy returns,” wrote Mark Dowding of BlueBay Asset Management, Co-manager of the St. James’s Place Strategic Income fund.
Promising progress against the coronavirus, including the rollout of mass vaccination programmes, aren’t yet enough to quash the feeling that the road ahead will be littered with many hurdles. Last week, China recorded its highest number of cases per day in more than five months, while France enforced a new evening curfew for the entire country. Biopharmaceutical company Pfizer, meanwhile, announced that it will temporarily reduce some of its supplies as of next week, in order to ramp up production – not the news that EU countries wanted to hear amidst already-slow vaccine rollouts.
The picture is, however, fairly positive in the UK, where vaccination programmes are performing more effectively than those in Europe, and there were also some early indicators that the lockdown measures are having a beneficial impact on case numbers. Government scientists put the ‘R number’ – the rate at which the virus spreads – at 1.2, compared to 1.3 from the previous week.
That said, many areas are still afflicted by high case numbers – on Friday, the UK banned all travellers from South America and Portugal due to unease upon the discovery of a new variant in Brazil. The UK government then swiftly announced further travel restrictions, including the closure of all travel corridors, which will be in force until at least 15 February.
The US tempest
Elsewhere in the world, the political storm was far from over in Washington, with Donald Trump being impeached for the second time. The first president in history to ever be impeached twice, the House of Representatives’ broke party ranks and made this historic move after Trump goaded his supporters to attack the Capitol almost two weeks ago, which descended into violence and bloodshed.
Now facing a trial in the Senate, the timing means that the verdict of Trump’s impeachment trial can only be delivered once he has left office. If found guilty, he could not only lose some of the benefits afforded by former presidents; but, indeed, he may also never serve again in any federal office.
Unaffected by the latest dramatic headlines, markets appeared to be more concerned with the longer-term repercussions of the incoming administration. Investors have weighed up the unparalleled developments in Washington and concluded that they aren’t as critical for investment returns as the economic backdrop.
Spend to mend?
Last Thursday, markets studied the details of Joe Biden’s pledge regarding the future of the economy. In his speech, he vowed that his government would support the economy by providing an extra $1.9 trillion of public spending, which includes an additional $1,400 to all Americans (on top of the $600 that they have already received). He also reiterated his campaign message about funding the stimulus with higher taxes on large companies, adding that he would ensure that “everyone pays their fair share”.
Investors are keeping a keen eye on this extra spending, in the hope that it will support the US economy’s recovery in the months to come, amidst high infection rates and worsening economic data, which are causes for grave concern. Last week’s figures indicated that the number of people filing for jobless benefits increased by its biggest weekly figure since March 2020. Meanwhile, on Friday, Wall Street stocks saw a downturn after official figures revealed that retail sales fell short of expectations in December.
The forthcoming weeks will be somewhat telling as to what the state of play is for the recovery of the global economy, as ‘earnings season’ gets underway. Large public companies are due to release their earnings figures for the past quarter – those reports will be full of clues that investors can use to gauge how well companies are coping in these uncertain COVID-19 times.
Adapt to survive
While the end of the week was not so rosy for the London stock market, it has, however, enjoyed a decent start to 2021 thus far – some market commentators imply that this could be put down to the effect of the post-Brexit trade deal that was signed at the 11th hour last year. Recent figures for gross domestic product (GDP), released on Friday, showed that the economy shrank by 2.6% in November compared to the previous month.
Nevertheless, the dip was lower than some forecasters had anticipated. Could this be because businesses adapted better to November’s restrictions than they did in spring last year? Paul Dales, Chief UK Economist at Capital Economics, said: “The economy has built up a fair bit of immunity to lockdowns.”
“Overall, we think that the UK market has the ingredients for better performance relative to other markets than of late,” said Adrian Frost from Artemis, which manages the UK & International Income fund for St. James’s Place.
“It would also appear that corporate fundamentals are much better than one would have feared just a few months ago. While Brexit may provide another leg higher for previously unloved value stocks, it should be good for UK equities as a whole.”