The Lowdown │ Global Markets to 20 December 2020

The Lowdown Global Markets to 20 December 2020

Published December 21, 2020


  • Global equities hit record highs with the MSCI World Index reaching a new peak
  • The UK government announces new tier 4 measures in response to a new variant of Covid-19; the furlough scheme is extended, and the date of the next budget announced
  • Still no post-Brexit trade deal as the end of the transition period approaches
  • Global and regional economic expectations improve, the emerging markets benefit from foreign investors allocating new capital to these countries
  • A positive investment backdrop for 2021: the economic recovery will allow for a widening out of sector rotation

Global Market Summary

Global equity markets traded unpredictably throughout last week following a mixture of good and not-so-good news: but the MSCI World Index, which tracks stocks across the developed world, reached a new high on Thursday. However, it fell back on Friday as Covid-19 infections continued to spread across Europe, the UK and the US.
In response to this worsening situation and the discovery of a more virulent variant of the virus, the UK announced new stricter tier 4 restrictions for London and the south-east. This is a major blow for millions of people across the country who were hoping to be able to meet up with family and friends, but who are now faced with having to alter their festive plans.
The authorities are nevertheless pushing ahead with their inoculation plan: some 140,000 people in the UK have already received their first dose of the Pfizer/BioNTech Covid-19 vaccination. Most of these have been given to people over the age of 80, care home workers and NHS staff at more than 70 sites across the UK.
Over the coming weeks and months, the vaccination campaign will pick up speed as more doses become available. This will hopefully reduce the rate of transmission and bring down the “R” rate, thus enabling the government to relax the extremely stringent measures currently in place.
Chancellor Rishi Sunak has extended the furlough scheme for another month until the end of April next year in a bid to support businesses up and down the country and keep millions of jobs secure. He also confirmed that his annual budget would be delivered on 3 March 2021.
In other announcements, the Bank of England said that interest rates would remain unchanged at 0.1%, and that it would not add to its £895 billion bond purchase programme. While the good news about vaccine distribution is almost certain to benefit the UK economy, the stricter measures announced over the weekend will almost certainly hit short-term growth.
In the UK, store closures and social distancing rules already affected retail sales last month, although food and household goods stores fared better. Meanwhile, Internet retailers have seen a huge rise in sales and market share over the 12 months to November.
Unfortunately, with only days to go until the transition period ends on 31 December 2020, the UK and the EU have yet to secure a trade deal. There is a very real prospect of no post-Brexit trade agreement being reached unless there is a “substantial shift” from Brussels in the coming days. Should we leave without a deal, the real anxieties will then start to take hold: in addition to concerns over the Northern Ireland situation, it is not unreasonable to expect border disruption, interruptions to medical supplies and higher food prices, not to mention social unrest and a further dent in UK GDP. And those are just the known knowns…
The current US administration has, however, indicated that a free-trade agreement could be reached with the UK relatively swiftly before the late-January inauguration of President-elect Joe Biden. But the UK government would need to compromise on a number of key thorny issues – such as food safety. And Mr Biden is unlikely to support a trade deal if Brexit compromises the 1998 Good Friday Agreement.
Elsewhere, foreign investors have been reallocating capital towards the emerging markets this quarter at the fastest rate for seven years. Attractive valuations – both historically and relatively compared with the developed markets – have boosted investors’ appetite for this asset class.
This shift into emerging markets could also be attributed to the belief that many of these countries have put the worst of the pandemic behind them. Supportive monetary policies worldwide and a weaker US dollar will act as a tail winds for many of these economies. Indeed, China and India could well end up being the standout economies when it comes to growth next year. Similarly, if commodity and oil prices were to rise further, this would be positive for countries such as Russia and Brazil.
Wall Street has been the scene of some spectacular increases this year – particularly for technology stocks. And professional investors believe that the wider S&P 500 Index will continue to rise over the coming 12 months (along with Europe and Asia). Any sustainable recovery in the global economy next year is likely to be positive for global equity markets. Indeed, a recent investment survey revealed that fund managers were more optimistic about stocks than they had been for six years.
As we come to the end of an extraordinarily turbulent, Covid-19-affected 2020 and look towards a non-Covid world and a global economic recovery in 2021, embracing the right asset allocation will be of paramount importance. As winter transitions into spring and the various vaccination programmes start to deliver results, the global economic news should start to improve.
US growth is now predicted to surge in 2021, and inflation should rise – albeit rather slowly, given all the spare capacity across the world. Asia – powered by China’s recovery and the attractively-priced emerging markets – will be a source of further interest for global investors.
A significant rotation in stock market leadership is highly probable: cyclical sectors are likely to be supported by the economic recovery. Global small cap stocks look set to benefit, while a further acceleration in disruptive trends will support many of those technology stocks that have been so successful throughout Covid (those that have enabled the widespread adoption of remote working, for example).
Further fiscal and monetary stimulus packages could be on the horizon. These will support risk assets, but are likely to further weaken the US dollar – good news for emerging markets and commodities. This all bodes well for a prosperous 2021. But as this year has so effectively demonstrated, it’s the “unknown unknowns” that end up scuppering the best laid plans.
On that note, it only remains for me to wish you all a merry Christmas and a happy new year, and to thank you all for your support throughout what has been a sad and challenging year for so many of us.