MARKET COMMENTARY – JANUARY 2021

Equity markets continued to rally in the final quarter of 2020, significantly outperforming the majority of other assets. The US election results and positive news of COVID-19 vaccines contributed to wider market gains, with more economically sensitive sectors seeing some of their strongest performance in recent years. Smaller companies also gained significantly on optimism over a robust economic recovery in 2021 as mass vaccination enables pandemic restrictions to be wound down.

This confidence was in spite of rising coronavirus infection rates in Europe, the UK where the emergence of a new strain of the virus has increased transmissibility, and the US. The fear of healthcare services being overwhelmed has resulted in the implementation of new stringent lockdown measures to slow the spread of the virus and this will impact economic growth, particularly in the services sector.

Concerns over the rising virus case load have though been largely overshadowed by the approval of the Pfizer/BioNtech, Moderna, and AstraZeneca/Oxford vaccines and although the path to recovery may not be entirely smooth, a mass vaccination programme allows an end to the crisis to be in sight which has been reflected in the performance of markets.

To justify this improvement in sentiment, it is crucial that the vaccines are manufactured, distributed, and administered rapidly and that populations are willing to receive the dose.  Any mutation of the virus is a concern although scientists expect that the vaccine will remain effective, possibly with modifications if necessary. The impact of the vaccine announcements in November resulted in a very significant change in market momentum with hard hit sectors such as energy, traditional retail, hotels, airlines, and financials rallying strongly while the pandemic winners such as online retailers, healthcare, and home improvement companies lagged, although still gaining.

From a regional perspective, emerging market equities and Asia particularly, performed strongly in the latter part of 2020, benefitting from the renewed hopes of economic recovery, a weaker US dollar, and rising global trade activity which should continue once the current wave of infections is supressed and the vaccination programme progresses.  China and South Korea notably benefitted from increased overseas demand with exports reaching the highest levels since 2011.

US stocks reacted positively to the election result with the prospect of Joe Biden’s administration being less confrontational on trade and foreign policy issues, although with the Democratic Party taking control both houses of Congress there could be a less business friendly environment, the possibility of tax hikes and the threat of tighter regulation for technology and healthcare companies.  This scenario should also see greater levels of fiscal stimulus being provided putting pressure on US treasury yields.

The EU has agreed a substantial support package worth up to €1.8 trillion, subject to ratification by the national parliaments of the member states, with a substantial proportion of the budget and recovery fund to be spent on sustainable and green energy projects.  With the EU agreeing tougher climate goals for 2030 and clean energy likely to be a focus of the Biden administration, significantly higher investment in renewable energy can be anticipated.

The successful conclusion of an EU/UK trade deal before 31 December meant that significant disruption to trade was avoided, although the longer term economic implications of the UK’s withdrawal from the EU will take some time to emerge.

In bond markets, central bank interventions remain the dominant feature and despite market hopes of economic recovery a significant rise in bond yields is not anticipated, with interest rates and yields likely to remain low for a prolonged period of time to support economic recovery and the servicing of increased levels of debt.

The first quarter of 2021 is expected to be very challenging for the global economy with weaker economic data from western economies expected as continued pandemic related restrictions apply.  So far the market has been broadly willing to look through the short term weakness due to the vaccine developments and policy support measures, but disappointment on the vaccine rollout could see market volatility increase.

For investors outside of the UK 2020 generally delivered strong returns, fuelled by companies benefitting from the pandemic related to changes in consumer behaviour, notably technology companies and online retailers. As the new economic cycle commences valuations for many sectors are higher than normal when emerging from recession and interest rates are close to their nominal floor. The emphasis looks likely to be on identifying regions, sectors, and companies where earnings and profitability prospects are underappreciated, a scenario which may benefit the UK market. Seeking diversification from areas outside of government bonds is also expected to be a theme, as interest rates remain extremely low and return potential limited, the benefit of this asset would appear to be restricted to its safe haven status in the event of further market instability.

Performance to 31 December 2020

 *November 2020

Source of data: FE Analytics, www.bankofengland.co.uk, www.ons.gov.uk

The content contained in this article represents the opinions of MacIntosh & James Partners Ltd. The commentary in no way constitutes a solicitation of investment advice and should not be relied upon in making investment decisions. Past performance is not a reliable indicator of future results. The value of your investments can fall as well as rise and are not guaranteed.