WeekWatch -‘Flurry of vaccine breakthroughs’ December 2020
After the flurry of vaccine breakthroughs in recent weeks, and with 2020 drawing to a close, investors are focusing on the shape of the economic recovery that they expect to take place in 2021.
Last week, the OECD published its twice-yearly economic outlook for countries around the world. It thinks that the UK will suffer more economic damage from COVID-19 than any other developed economy, predicting that GDP will be 6.4% lower at end-2021 than it was at the end of last year. By contrast, it thinks that China will be 9.7% larger, and the US will have lost just 0.1%. Despite the sombre forecast, however, UK stocks hit their highest levels since March last week.
Meanwhile, the effects of the pandemic on the economy were revealed last week by the different fortunes of various retailers. After an earnings boost caused by being some of the few places allowed to stay open during lockdowns, the biggest supermarkets paid back huge sums of business rates relief that they have received from the government this year. But, on the other hand, ‘non-essential’ shops that were forced to shut this year have suffered: last week, 242-year-old retailer Debenhams said it will soon close; while Topshop owner Arcadia also went into administration. Over the weekend it emerged that Frasers Group tycoon Mike Ashley was in talks with Debenhams about a possible rescue deal.
Oil prices hit their highest level since March after oil-producing countries agreed to boost supply from January next year. The increase can be interpreted as a sign of confidence in the world economic rebound in 2021. However, the production boost is less than had been agreed upon previously, so was also evidence of cautious optimism among oil producers.
At the time of writing on Monday morning, Brexit trade negotiations were in their final stage. After the weekend failed to produce an agreement, there is now very little time to find a compromise before the UK’s transition period ends, meaning that an announcement is likely this week. Markets appear to be expecting a deal, so the pound could drop if the talks fall apart this week. But, as Capital Economics notes, the difference between a Brexit deal and no deal aren’t as big as they once were, given that the UK has pursued a relatively ‘hard’ Brexit already.
As a tumultuous year ends, forecasters are trying to sketch the path of the recovery in 2021. Will the world return to normality sluggishly, as happened after the financial crisis of 2008? Or will world economies bounce back faster once the virus has been brought under control?
“This is not 2008 – it couldn’t be more different,” said Jeffrey Cleveland, chief economist at Payden & Rygel, co-manager of the St. James’s Place Diversified Bond fund.
There are a few reasons why the economic recovery in 2021 may be livelier than the one that followed the financial crisis, he added. This recession has been led by the services sector, he says, which is poised to make a comeback in 2021. Governments have also enacted far more fiscal stimulus this time around. Plus, recent data show that consumers are spending more freely than they did after 2008, and, due to lockdowns, are also sitting on savings that they are ready to spend once they can.
As US stocks reached fresh highs last week, certainly investors appear more optimistic about the prospects for 2021.
However, as always, investors should try to avoid getting swept up in the optimism. Given the remarkable rally that’s already taken place this year, markets might slow down in 2021 as the reality of distributing and administering vaccines sinks in, said Mark Dowding of BlueBay Asset Management, co-manager of the St. James’s Place Strategic Income fund.
This slowdown might lower investment returns, he added: “Looking at how far markets have travelled this year, it feels like investors have been eating a ‘substantial meal’ in 2020…maybe 2021 will resemble more of a ‘Scotch egg’.”
Just as 2020 was a lesson in the importance of investors not reacting to short term volatility, so they should not get carried away with the potential for a more positive outlook. As the saying goes, markets are always climbing a wall of worry.
Payden & Rygel and BlueBay are fund managers for St. James’s Place.
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