Wellesley WeeklyWatch – Optimism is high, but concerns remain in the background

16 February 2021

Stock Take

It’s been another week of gains as investor optimism helped US and world stocks to hit new highs at various points.

Investors have plenty to be optimistic about – President Biden’s team has made progress with its economic stimulus package, and with vaccine programmes prompting the market to rally during the opening of the year, many have strong hopes that the world will enjoy a strong economic recovery this year. The record amounts of money that flowed into equity funds during the week – $58 billion, according to data from the Bank of America – was one sign of this positivity.

Concerns still linger in the background, however; the high valuations of many stocks, stubbornly high COVID-19 infection levels, new variants of the virus, and vaccination delays in some countries.

The UK woke to the sobering news on Friday, that its economy suffered its largest drop in 300 years, shrinking almost 10% in the last year – a reminder of the economic damage caused by COVID-19.

Bursting bubbles

Last week, Jay Powell, the Head of the Federal Reserve (the US Central Bank), pledged to continue supporting the world’s largest economy until it’s on firmer ground. It was a reassuring announcement for some investors, because it was support from central banks around the world that was crucial to lifting markets out of their lows last year.

Low interest rates and asset-purchasing schemes have kept investors confident through the pandemic-induced turbulence – however, there are fears that an economic recovery this year could cause higher inflation, thereby pressuring central banks to keep it in check by pulling back support.

The question of what will happen when support does get tapered back is making investors understandably cautious, however comments like Powell’s last week mean that it is unlikely for now, as noted by Johanna Kyrklund, Chief Investment Officer at Schroders and Manager of the St. James’s Place Managed Growth fund:

“Markets feel bubbly, but bubbles tend to get pricked by higher rates,” she said, adding: “For now, the central bankers are keeping their needles safely tucked away.”

Locking (Ox) horns

While some of the largest Asian markets were closed on Friday to mark the Lunar New Year, which signals the start of the Year of the Ox in China, President Biden began his first telephone call to his Chinese counterpart Xi Jinping on a positive note, wishing him a happy new year before discussing how to deal with COVID-19, climate change, and weapons proliferation, according to a statement by the White House.

Subject matter also began to tackle some thornier topics; the White House said that the president raised concerns about Beijing’s “coercive and unfair economic practices, crackdown in Hong Kong, human rights abuses in Xinjiang, and increasingly assertive actions in the region, including toward Taiwan”.

It is expected that the Sino-American relationship will once more take centre stage as a more influential force in the markets this year as the world’s recovery against COVID-19 speeds up.

All-time high for cryptocurrency

Bitcoin caused cryptocurrencies to hit the headlines once again last week, as it reached an all-time high of more than $48,000. It seems to have been prompted by news that Tesla has invested $1.5 billion of its own funds into the token and will even soon accept it as payment for their cars.

It reignited the debate around whether cryptocurrencies have the potential to ever work as proper currencies, given how regularly and extremely their values fluctuate. Hamish Douglass, co-founder of Magellan, which manages the St. James’s Place International Equity fund, commented:

“Currencies should be pretty stable. They shouldn’t go up and down 200% in a year.”

He added:

“It’s something we would pass on. But if you’re going to do it, treat it like a punt at the races.”

And there is one part of the story that many commentators have overlooked – ‘mining’ (the process of creating the currency) burns a lot of electricity.

“It’s estimated that the electricity consumption from digitally mining Bitcoin is already greater than the total electricity consumption of Argentina, even before the latest spike in prices,” wrote Mark Dowding of BlueBay Asset Management, co-manager of the St. James’s Place Strategic Income fund.

Now that environmental, social, and governance (ESG) concerns are forefront worries of the world’s leading businesses and investors, the debate around cryptocurrencies will need to keep that fact in mind.

Wealth Check

It’s just over two weeks until Chancellor Rishi Sunak delivers his first Budget statement since March 2020. The impending threat of the UK’s second COVID-19 wave meant the Autumn Budget was scrapped, and, six months on, Sunak still faces a huge challenge – how and when to begin the task of recouping the massive cost of the government’s pandemic support, without stifling economic recovery in the spring and beyond.

Tax hikes that might jeopardise economic activity are therefore unlikely, seemingly ruling out significant changes to Income Tax, National Insurance and VAT. These kinds of increases would also mean breaking the government’s ‘triple lock’ manifesto pledge – a risk it is unlikely to take.

While the idea of a one-off wealth tax has reportedly been ruled out, speculation continues over the broader issue of capital taxes. Any changes resulting from the reviews of Capital Gains Tax and Inheritance Tax conducted for the government by the Office of Tax Simplification have yet to be seen.

It’s possible that next month’s Budget will be more of a roadmap for future tax plans, which means more sweeping changes could come in the Autumn Budget. It seems certain, however, that the tax burden on individuals and businesses will have to increase, which underlines the importance of maximising current tax reliefs and allowances. Indeed, considering the many unknowns, it might make sense to bring forward planning for the end of the tax year and take steps before the Budget.

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

In the Picture

Although things will remain challenging in the short term, vaccination programmes have made the longer-term picture much brighter. The world’s economic recovery can begin in earnest this year, says John Goetz from Pzena Investment Management.

The Last Word

“We should spend the next decade focusing on the technologies, policies and market structures that will put us on the path to eliminating Greenhouse Gases by 2050.”

Bill Gates, Founder of Microsoft, says the best response to a “miserable” 2020 is to focus on the future.

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

BlueBay, Magellan, Pzena and Schroders 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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