Please find below our Investment Market Update as at 8th January 2021.
Blue Sky Investment Market Update
What a start to the year!
Certainly, there has been no shortage of news flow. A week to remember for sure.
It’s interesting to note though, as the avalanche of bad news gets worse, equity markets rise!
So, what’s going on?
Let’s get some of the bad news out of the way
Just a few days ago, the Brexit deal was the main talking point across our news channels. As with many things over the last year (time seems to have flown) the government agreeing a deal with Europe seems months ago, when in fact it’s just a matter of days since it was ratified and signed. There is never a dull moment is there and the new variant strain of the virus and its implications have taken centre stage, but even this got moved off the front pages as Trump supporters stormed Capitol Hill. I nearly said “unbelievable”, but sadly it isn’t!
Quite how the Brexit deal will manifest itself in terms of how we live our lives and how it will impact us economically remains to be seen. Politics and sovereignty aside, the Office for Budget Responsibility (OBR) sees the deal causing a significant drop in output for the UK. They are predicting the long-term loss of output at being about 4%, compared with remaining in the EU.
New variant of the virus
The rise in infections and the resultant lockdown will naturally cause a drag on economic activity around the world. We have done many things wrong but at least we appear to be ahead of the game when it comes to having stocks of the vaccine, we just have to sort out the logistics! The key, of course, is administering the vaccine quickly enough so restrictions can be relaxed.
The double whammy of Brexit and the new lockdown means that previous economic forecasts will not materialise. Gross Domestic Product (GDP) was predicted to grow by 5.5% this year (the strongest growth rate since the late 1980s) according to the OBR, but the UK economy is now not expected to return to pre-pandemic levels until late in 2022.
Finally, he has acknowledged defeat, albeit not graciously. The country is in turmoil and undoubtedly, it is an embarrassment for the American constitution. Ironically, it is in times of such crisis that people are united and good things may come out of this. The New York Times reported that “Republicans and Democrats locked arms to denounce the violence and express their determination to carry out what they called a constitutionally sacrosanct function”.
“The upheaval unfolded on a day when Democrats secured a stunning pair of victories in run-off elections in Georgia, winning effective control of the Senate and complete levers of power in Washington”.
Why are equity markets rising when negativity is all around us?
When managing money, it’s always essential to look beyond the noise and try and work out the possible manifestations in the immediacy and into the future. The cause and effect and the direction of travel of markets is often at odds with the layman’s initial instincts – which is why so many amateur investors make wrong decisions.
Earlier in the week the headlines were around the S&P 500 index (US) having its slowest start to a year since October. These were the headlines in the FT on Monday “Wall street suffers worst day since October on virus advance”, yet equity markets have since surged.
So, what’s going on?
The game changer for global equity markets was that Biden, to coin the New York Times phrase, ‘now has the complete levers of power in Washington’. The anticipation is that the much publicised and stalled stimulus packages will finally materialise which will give a boost to the economy. With the US being the world’s largest economy, this is important for economic growth around the world.
Interestingly, this is at odds with comments in Forbes magazine back in September, when many experts suggested that the best outcome for markets was a split Congress. How quickly things can change!
How do we see the outlook for 2021?
Next week I will be speaking to all our investment partners as part of our quarterly review and I will provide you with a more in-depth overview.
In the meantime, here are our general thoughts:
- Equities will continue to rise but care needs to be exercised in certain sectors where stocks may overheat
- Fuelling the appetite for growth is that interest rates and bonds are delivering poor returns
- Some companies, who have previously frozen their dividends, are now looking to reintroduce them which will further help the drive in sentiment towards equities
- The FTSE 100 has lagged its counterparts across the developed world, in part because it is dominated by certain sectors. We see some of these sectors as now offering good value and have realigned some of our portfolios as a result. The weaker pound has helped many shares of businesses that are export led
- We continue to favour Sustainability and Infrastructure. The events of the last couple of days in the US has given a further boost to these sectors with much of the anticipated stimulus targeting such areas
- The role out of the vaccine delivered much needed confidence too; in late October equity markets were beginning to stall. Since the announcement of vaccines at the beginning of November last year, the FTSE 100 for example has risen by over 20%. Now, I know this is an unfair comparison on many levels but that is about the equivalent of 25 years’ interest from a bank and building society at current levels of interest!! But, just to be clear, emptying all your money from the bank and placing into the FTSE 100 is not recommended!
- Continued financial support from central banks and governments have provided a platform of confidence. Comments like “we’ll do whatever it takes” are important for companies and investors to hear.
Of course, there is so much more to consider, and we’ll be providing more detail in our quarterly updates.
In summary, there may be lots of doom and gloom about but the immediate outlook for our invested clients looks very rosy indeed.
Gary and the Investment Team
Please Note: This communication should not be read as giving specific advice regarding your personal circumstances. This would only be given following detailed assessment of your individual needs. The value of investments may fall as well as rise; you may get back less than invested. Past performance is not necessarily a guide to future returns.