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Broomer’s Blog: 2021 so far

08 Jan, 2021 | Return|

While the new year has just begun, there have already been a number of developments which could impact stock markets. This latest market update explores three areas. First, the new lockdown – the last ten months have clearly been very difficult for society as a whole and once again we are facing the worst throes of this pandemic. We will also look at Brexit, and finally US politics where there have been a number of interesting developments over the last few days.

Turning first to the national lockdown, from a stock market perspective at least, there is no great change to the status quo. There was always the expectation that this was going to be a challenging winter, and as infection rates reach new highs, the NHS is nearing its capacity to deal with the consequences. The Government was left with few options, none of which would have been particularly palatable, and so has taken the unpleasant decision of imposing a new national lockdown. Markets have already witnessed this turn of events, and while there will be some short term impact on corporate earnings, the Government will intervene to offer support during this difficult period - the furlough scheme has already been extended to March. While this will be costly, the public purse will bear most of this burden. Markets will look beyond this and the vaccine is clearly good news which sets a more defined timeline for the end of this pandemic. Hopefully by early spring, restrictions will start to be eased, and eased quite quickly as the vaccine is rolled out, and it is reasonable to expect that life will return to some semblance of normality through the summer and into early autumn. In the short-term, there is no option other than to accept the situation for what it is, but markets at least seem to be remaining stable in light of this latest development.

Moving to Brexit, a deal was signed over the festive period which is very positive news. After four years of uncertainty, there is now some resolution over what a post-Brexit world will look like. It is interesting to see how markets have reacted, particularly currency markets which have been largely unmoved by the deal. It was not a particularly good deal for the UK in our view, but certainly better than no deal and probably as good as could be expected given the state of negotiations. The new agreement will introduce additional costs for businesses, particularly for those that trade with the EU, and it will be worth monitoring the magnitude of those costs over the coming few quarters. Thankfully, the ferry ports seem to be running smoothly removing the immediate fear of blockades and lengthy queues.

The UK stock market has continued to perform strongly over the first few days’ trading of the new year. This does not seem to be particularly related to Brexit, but more down to the discount that the UK market is trading on relate to other global markets. As we know, the UK market has been badly affected by the pandemic and the shadow of Brexit has further deterred investment in the UK. With that political uncertainty now removed, investors once again are beginning to look more closely at UK equities. In the few trading sessions that we have had so far this year, the FTSE 100 has been outperforming the more domestically-focused mid and small cap areas of the market which reaffirms that the view this rebound is not necessarily linked to Brexit but is much more of a valuation opportunity for international investors.

The finalisation of Brexit agreement does lead us to favour more greatly a stock picking approach. With the end to political uncertainty, investors can now focus on business fundamentals and strategy which play to the skill set of active managers.

Finally, we turn to US politics. The transition of power from the Trump to the Biden administration has been messy but market reaction has been subdued. Donald Trump has done a remarkable job of turning the bastion of democracy into something that looks much more like a banana republic. While this is an embarrassment from a political perspective, there should be no major economic ramifications as a consequence. The results of the Senate elections in Georgia this week are perhaps more significant for markets. Surprisingly, the Democrats managed to take both seats providing them with a majority in the Senate. Coupled with their majority in the House of Representatives and a Democrat president in the shape of Biden, they now have control of Congress. They do not enjoy a super majority in the Senate and so their control of Congress is not complete, but it does give them much greater latitude to enact their manifesto pledges. Biden has promised to increase spending on social safety nets, healthcare, infrastructure and green and environmental issues and he will seek to finance that through higher taxation. The US market is likely to be relatively neutral on this given the boost that the additional public spending will bring. However, the highly rated technology stocks are probably most vulnerable to higher taxation levels going forward. However, there are some interesting opportunities that may well benefit from this change in the political landscape.

Asset Class Allocation, December 2020

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