Wellesley WeeklyWatch – Post-inauguration positivity in the US versus lockdown lamentation in Europe

26 January 2021

Stock Take

Democracy prevails

“We’ve learned again that democracy is precious, democracy is fragile and, at this hour my friends, democracy has prevailed.”

The inauguration of Joe Biden, the 46th President of the United States, went ahead as planned on Wednesday 20th January, where he conveyed his wish to move on from the recent siege of Washington DC’s Capitol Hill. Appealing for solidarity, he implored the nation to carve a way forward, by putting America’s “uncivil war” behind them.

Biden proceeded to launch his administration with a bang, reversing many of Donald Trump’s policies on his first day in office. He also signed a flurry of executive orders, including that of rejoining the Paris climate accord, halting the United States’ departure from the World Health Organization, and overturning the travel ban on citizens of Muslim-majority nations entering the US.

Stock markets across the globe saw record highs following the inauguration, appearing to cheer a change in leadership for a much-needed positive economic impact. Biden’s pledge to provide a $1.9 trillion stimulus package to hopefully boost the country’s recovery will undoubtedly have the greatest short-term impact.

That aside, it will take some time for the new administration to establish itself, suggests Mark Dowding of BlueBay Asset Management, Co-manager of the St. James’s Place Strategic Managed fund.

“We sense that those expecting very rapid progress with respect to the latest fiscal support package could be a little disappointed in the short term – even if more ambitious plans are building in the medium term regarding future initiatives on infrastructure spending, clean energy, the environment and other initiatives designed to deliver an agenda of transformation over the next few years,” he adds.

Chinese whispers?

Chinese markets likewise enjoyed a buoyant week, after data showed that the country is leading the global economic recovery post-COVID-19. Draconian lockdown measures to control the virus, combined with some government stimulus, appear to have worked well, meaning the economy is now gathering pace and approaching pre-pandemic rates, although experts often question the accuracy of China’s economic data.

“China has been the only major economy to grow in 2020. Analysts are now busy revising forecasts of when China is expected to overtake the United States as the world’s largest economy to as early as 2026,” shares Martin Hennecke, Asia Investment Director at St. James’s Place.

Hennecke indicates that there’s no one way of measuring the size of an economy. If based on the most commonly used version (in other words, the ‘nominal GDP’), then the United States is the forerunner. However, if you use a measure that accounts for how expensive things are in different countries (‘purchasing power parity’, according to economists), then China’s economy is the larger of the two.

“My personal take is that reality probably lies somewhere in-between, and that the two economies are of about equal size at present,” adds Hennecke.

European pallor

Despite having had an upbeat start to the week, European markets were on the back foot on Friday. Data released this week show that lockdowns have left their mark on the region’s economic recovery. According to figures from IHS Markit, business activity in the UK, France and Germany is down compared to December 2020.

In the UK, meanwhile, December retail sales figures reveal that sales fell short of expectations. The most important month for the retail industry led to a rise in volume of only 0.3% versus November.

In terms of the future, there’s some apprehension around the fact that the Chancellor’s rumoured plans to increase the main rate of corporate tax could stifle recovery. On the other hand, Capital Economics implies that any rise would probably be balanced out by further government spending, meaning it wouldn’t have much effect on the economy.

In the meantime, vaccinations across the continent continue to suffer setbacks. Pfizer has momentarily stopped deliveries, due to delays – the result being that parts of Germany, Italy and Spain have had to postpone vaccinations. Although the long-term picture appears more positive, the short-term impact of the postponement led to a subdued atmosphere last week.

Long-term gains

It’s common knowledge that all manner of businesses are suffering at the moment. But challenge can nevertheless give way to opportunity, most notably for investors who are willing to look long-term, writes Andrew Pastor from EdgePoint, which co-manages global funds for St. James’s Place.

“During periods of uncertainty, the time horizon of the average investor tends to shrink dramatically. As a result, we think investors today are placing too much emphasis on the near-term prospects of businesses. They’re ignoring many high-quality companies whose next three or six months might be uncertain, but whose next three-to-five years are highly predictable.

“Short-term uncertainty has nothing to do with survivability or growth. We own businesses that we believe will not only survive, but will be much bigger in the future,” Pastor adds.

Wealth Check

It’s been reported that Chancellor Rishi Sunak has rebuffed proposals for a one-off wealth tax on UK citizens who have assets exceeding £500 million, calling it an “un-Conservative” notion. The plan would have nevertheless raised £260 billion, which isn’t far off the government spending figure on coronavirus support to date.

The news has left a lingering question mark as to how and when Sunak will indeed take measures to plug the hole, with the Budget on 3rd March being an initial opportunity to find out more. Finding alternative ways to loot the wealth are still said to be high on the agenda.

Last year’s review by the Office of Tax Simplification proposed reforms to Capital Gains Tax, including aligning the rates to Income Tax levels and cutting the annual exempt allowance from £12,300 to as little as £2,000. This would further heighten the appeal of tax-efficient wrappers, such as pensions and ISAs, as solutions to help establish long-term wealth.

The chancellor has to be on his guard to avoid putting any economic recovery in danger. Last week’s sorrowful retail sales figures are a timely reminder that governmental financial support is still very much needed.

With no definitive end in sight for the current lockdown, one of the few upsides is having some breathing space to look at and plan our finances. The end of the tax year is imminent and the Budget is just over five weeks away, and so it might prove wise to get ahead and maximise on current tax allowances and rates. It seems certain that taxes can only head one way – but what nobody knows is how soon.

The levels and bases of taxation, and reliefs form taxation, can change at any time. The value of any tax relief depends on individual circumstances.

In the Picture

If you’re delaying starting a pension or are uncertain about whether to add more to your current pot, here’s why you shouldn’t put it off any longer. The impact of compounding returns is a potent force in helping you put together the funds you need for a sustainable retirement that could last 30 years or more.

These figures are only exemplary and are not guaranteed – they are not minimum or maximum amounts. What you get back depends on how your investment grows and the tax treatment of the investment. You could get back more or less than this.

The Last Word

“We will press forward with speed and urgency, for we have much to do in this winter of peril and possibility.”

Joe Biden strikes a hopeful note in his first presidential address.

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

BlueBay and EdgePoint are fund managers for St. James’s Place.

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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