Following the positive news that COVID-19 vaccines had been developed, there was hope that life might return to normal sooner rather than later. This optimism caused investors to rotate out of many companies that have fared well during the pandemic, to businesses in relatively harder-hit cyclical sectors. This rotation continued into the new year; however, as concerns over new variants of the virus have developed, optimism has waned, and to some extent, this rotation has reversed. Whilst the flow of news has been unrelenting, the prospects for further fiscal support, prolonged low interest rates, and the wider rollout of vaccines is expected to continue to support equity markets.
In the US, Joe Biden was sworn in as the 46th President. The transition may have been delayed by Trump, but the Biden administration is progressing quickly. His focus, as was reflected in his inaugural address, is on the pandemic and climate change, seeking unity and multilateralism in achieving these goals. The new President has already listed a stream of executive orders; including a $1.9 trillion relief package, which has been opposed by most Republicans; however, he may yet seek a compromise deal. US Treasury secretary, Janet Yellen, said the US could reach full employment next year if Congress passes the stimulus package. Her comments on stimulus, delays in tax rises, and reassurance that Trump’s corporate tax cuts are to be only partially reversed, were taken favourably by the stock market. As former Chair of the Federal Reserve (Fed), she is likely to give them all the powers they need to support the economy. There have always been fears at the start of Democratic administrations, of them being less business friendly, but historically, the US stock market has generally done as well under Democrat Presidents as Republicans.
At the Bank of England (BoE) Monetary Policy Committee meeting, they discussed if they could include negative interest rates as part of their toolkit. They decided to rule this out for the time being; however, if new variants of the virus become prevalent and cause further lockdowns, curtailing economic activity for longer, then the BoE may have no choice but to resort to negative interest rates. Throughout the pandemic, the BoE’s main tool for easing policy has been Quantitative Easing. However, with the BoE now owning much of the bond market, using this tool in the future against unexpected economic shocks may prove less effective, and may mean resorting to interest rate policy again. Whilst the outlook for growth in the UK was revised downwards given the current lockdowns, a strong rebound is still expected later this year. When the economy re-opens, consumers will be eager to spend their savings to enjoy leisure activities. The success so far of the vaccination campaign gives increased confidence in this outlook.
Following the Brexit deal at the end of last year, companies that trade across the border are adapting to the new trade rules. As this happens, difficulties are emerging, particularly over the Irish border. An extended grace period may be needed whilst these issues are smoothed over. Anecdotally, trade across the channel is also being delayed by the new paperwork. In Europe, the delivery of the vaccine has been much slower than in the UK, highlighting some of the problems associated with European bureaucracy. The EU threatened to stop deliveries of vaccines manufactured within the EU to the UK, but this was in breach of the Brexit agreement, and they backed-off rapidly.
Overall, we expect fiscal and monetary policy to continue to support developed economies. However, we continue to encourage a selective approach to equities and corporate bonds, focussing on companies with attractive long-term growth prospects, robust business models and strong balance sheets.