Monthly Market Outlook – November/December 2020

This year has been a turmoil of events; while many of our experiences of COVID-19 were the lockdown restrictions affecting our lives, it is important to recognise the tragedy of 1.6 million1 people that have died globally because of the virus. We started the year off on a firm footing, to then be hit hard by the pandemic and the unprecedented events that followed the outbreak of the coronavirus and the national lockdowns experienced globally. We are, however, looking to end the year on a more positive note again with vaccines in focus. The flow of news has been unrelenting, with significant economic and market-related developments occurring on an almost daily basis. It is no surprise then that the dispersion of returns between different geographies, styles, sectors and asset classes has been extraordinary.

The more vulnerable members of society and health workers have already started receiving vaccinations. However, manufacturing and distribution of the vaccines at scale will take some time, and it may not be before mid-2021 when the other vaccines become widely available, to help ease supply. However, there is some much-needed light at the end of the tunnel, and life should gradually return to ‘normal’. In the meantime, the virus continues to spread and measures to counter the pandemic, may be in place in one form or another for much of next year. As a result, it is still too early to be tightening financial conditions, and a continuation of the coordinated support, from both fiscal and monetary authorities, is still needed to prevent long-lasting economic damage.

President Trump’s legal efforts to overturn the election result was in vain, as the electoral college confirmed Joe Biden as the President-elect. Joe Biden’s campaign and nominations for key posts give us a clear idea of the direction he expects to take. One appointment worth highlighting is Biden’s nomination for Treasury Secretary, former chair of the Federal Reserve (Fed) Janet Yellen. Yellen will no doubt want to give the Fed as many tools as possible, enabling it to provide continued support to the US economy as it recovers from the pandemic. Some of Biden’s early initiatives will likely include re-joining the World Health Organisation and the Paris Accord on climate change, as well as increased spending on environmental projects. Should the Democrats fail to gain control of the Senate, Biden’s spending plans and proposed tax rises may be diluted. However, a more measured approach to diplomacy should still be welcomed by markets that dislike uncertainty.

However, some things stay the same; there has been little visible progress on a post-Brexit trade deal with the three key sticking points remaining unresolved. The first is the so-called “level playing field”, and whether the UK should continue to stick to EU rules on issues like workers’ rights, environmental regulations and state aid. The second is governance, to ensure both sides keep to any deal. And finally fishing, with the EU wishing to retain access to UK waters for EU fishermen. Even if these issues are resolved, the agreement would still need approval by each individual state, which may yet prove problematic. Boris Johnson warned that there is a “strong possibility” no agreement will be made, but insists this is not necessarily “a bad thing”. That said, both sides have agreed to “go the extra mile”, and talks continue. In the event of a no-deal Brexit resulting in World Trade Organisation terms, tariffs would be introduced on goods traded between the UK and EU. The concern, however, is less about the cost of the tariffs, but the administrative burden and the potential disruption this would bring.

Despite such an eventful year, many equity markets have hit all-time highs; a poignant reminder that keeping calm and carrying on investing during volatile times has proven to be the right strategy. Looking ahead to 2021, volatile markets are here to stay, but risk-assets should remain supported by low interest rates and a gradual return to normality.