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Market Update: December 2020

December 2020

by Stuart Carswell

ECONOMIC UPDATE

As we know economic growth collapsed in the first half of 2020 as Covid-19 enforced lockdowns and restrictions were introduced weighting on economies.

The announcement of successful vaccines in November from Pfizer and BioNTech, Moderna, and closer to home AstraZeneca / Oxford were a huge boost to life ‘returning to normal’ as 2021 progresses.

However, there are a number of hurdles still to jump; regulatory approval, manufacture and distribution of the vaccine – but these are likely to be overcome in the coming weeks/months.

Unfortunately, not all problems are solved by a vaccine – UK unemployment is likely to continue to increase. Some areas still look vulnerable – traditional retailers – this is highlighted by the recent demise of Topshop and Debenhams. This also adds pressure on property companies who have a large exposure to retailers. The sector also remains oversupplied.

Economic growth in 2021 is likely to rebound significantly from lows and it could be a record-breaking year as confidence returns to individuals and companies:

  • UK Savings Ratio increased to 29% at the end of June 2020 – which is off the charts. As confidence returns investors are likely to spend their savings which will provide a huge boost to the economy.
  • Stock markets look well supported in this environment and equities tend to perform their strongest when economies which are in recession start to come out the other side. Exactly the stage of the cycle we are in now.
  • The leadership and drivers look likely to change in stock markets. Technology was a great enabler in 2020 and has performed very well. However, as economies open up and life returns to normal other areas could pick up the baton as they recover from depressed levels. For example, travel and leisure.
  • The structural growth for the Technology sector is still present over the long term.
     

    US ELECTION

    Away from Covid-19, the US election has provided some certainty and hopefully stability in 2021. On Wednesday 20th January 2021 Joe Biden will be the 46th president of the United States. However, the US Senate is not yet decided. Two run-off elections are taking place in January 2021 and it looks likely it’ll be a Republican Senate – therefore a Democratic President and a Republican Senate.
     
    It appears unlikely that trade negotiations between the US and China will reverse (which weighed on markets in 2018) however, more cordial relations are expected going forward and less Twitter led politics.

    BREXIT

    Talks have made significant progress in recent weeks, but it looks like it will run down to the wire with the 31 December deadline fast approaching.
    There is an expectation of a trade agreement between the UK and EU – it is not in either party’s interest to not get an agreement – particularly as economies are still feeling the impact of Covid-19. Some of the sticking points include:

  • The EU is worried the UK will give financial help to its own firms, which it says would give them an unfair advantage
  • The UK is concerned about who will be allowed to fish in its waters
  • The EU fears the UK is trying to change an agreement made about the complicated case of Northern Ireland – the only part of the UK to have a land border with the EU
     
    If a deal is agreed, it could be supportive for sterling and UK assets which look cheap relative to other global currencies and stock markets. The ever-present risk of a ‘no deal’ Brexit from the transition period at year-end is one of the factors to have kept the Pound from attaining 2018 highs in line with those of other currencies, so Sterling might have scope for a substantial rally in the event that a deal is announced.

     


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