Six months to end November 2020
Driven by the advances in share prices in the United States, the global equity index (+12.8%) improved over the period. Although the failure to conclude talks between the EU and UK impacted sentiment, the UK market (+4.0%) recovered strongly during November to move higher over the six months. Fixed Interest investments (-3.5%) weakened during the period as positions in ‘safe haven’ assets were reduced, reflecting the nascent recovery in the global economy.
The recovery in share prices in the US has been led by the large technology stocks which have weathered the downturn better than most and have lifted indices to all-time highs. The US economy has also recovered more rapidly than elsewhere as lockdowns have been lifted quickly or never imposed but, as a consequence, the country continues to have one of the highest infection rates in the world. The President-elect, Joe Biden, made the strategy for dealing with the virus and its impact on the US economy a key plank of his campaign. As feared, President Trump appears unwilling to concede defeat, instead launching a series of law suits disputing the validity of the count in a number of key states. Prolonged uncertainty is unlikely to be taken well by the market but as little hard evidence of fraud has been presented it seems that the incumbent will, grudgingly, hand over the reins of power on 20th January.
In Europe, the European Central Bank has been focused on adding liquidity to support the markets and the banking sector, whilst the agreement to allow the issuance of EU-wide bonds, the first step to unifying fiscal policy and taxation across the EU, will help support the weaker countries of Southern Europe. However, with infection rates once again in need of control, a number of countries, including Germany, France, Italy and Spain, have been obliged to move back into partial or full lockdown. Although these lockdowns are likely to be less damaging that than the first, each country will be affected differently and further measures will be required to combat the economic impact of this pandemic.
The UK economy had been recovering over the summer in step with the easing of the lockdown measures but as the country is experiencing a ‘second wave’ of infections, this recovery is bound to slow. The impact has been particularly acute for the travel and leisure industries which are suffering some of the highest job losses despite the level of support offered by the Government through the furlough and return to work arrangements. To add to the uncertainty, negotiations with the EU have not been proceeding well and the chances of a ‘no-deal’ exit from the transition period are rising as the year end approaches. There appear to be three key sticking points surrounding fishing, the ‘level playing field’ and resolving disputes. Deadlines are being extended and the politicians are now involved but it is likely that the negotiations will continue up to the last minute.
Asia & Emerging Markets
China is demonstrating a rigid control of its borders and an aggressive response to any resurgence of the virus. This, coupled with a focus on stimulating the domestic economy, has allowed a relatively strong recovery to take place. However, diplomatic tensions with the West over trade, the status of Hong Kong and the South China Sea, show the increasing difficulty in accommodating China’s ambitions on the global stage. Although countries in Asia have proved more adept at dealing with the virus, largely due to their experience of the SARS epidemic, this has not included India which, along with South America, has become the epicentre of the pandemic. On a positive note, the US President-elect is likely to take a less combative approach to international relations which should benefit the region in the long run.
The measures required to combat the pandemic have had a significant economic impact, similar in severity to a global conflict. In financial terms, swift cuts to interest rates and funding to rebuild financial stability have proved helpful to sentiment and the cancellation and suspension of dividends is now largely complete. Encouragingly, a few of these payments are now being reinstated, albeit at lower levels than before. Focus has now shifted to maintaining this recovery in the face of a ‘second wave’ of infections which localised restrictions have not proved sufficient to control. Sentiment has been improved by positive news on a number of fronts from vaccine manufacturers but it is unlikely that a return to ‘normal’ will be possible for several months.
Murray Asset Management UK Ltd December 2020
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*Based on the representative indices.