WeekWatch – ‘Global markets are on track for their best month ever’ November 2020
Global markets are on track for their best month ever, after the announcement of several vaccines to fight COVID-19 and the election of Joe Biden shifted market sentiment to ‘risk-on.’ The US Dow Jones hit a record high last week and the MSCI World index of developed and emerging markets also surged.
“The range of potential outcomes of COVID-19 has reduced dramatically and that is very significant for the market,” noted Johanna Kyrklund from Schroders, manager of the St. James’s Place Managed Growth fund.
Fund managers think that market optimism will continue into the New Year and beyond as major economies slowly return to growth.
“I have always been amused by the advice to never forecast anything, let alone the future,” said Chris Iggo from AXA Investment Managers. “However, today I feel pretty confident that portfolios should be positioned for continued good performance from equity markets as we head into 2021.”
Markets responded well to Biden’s appointment of Janet Yellen as US Treasury secretary last week, and Donald Trump finally admitted that he would leave the White House if the Electoral College voted him out, reassuring politicians and investors that there will be a peaceful transition of power in January.
The period between now and Christmas may further encourage a positive start for markets next year.
“We are hoping that the news events in the next few weeks – comprising European Central Bank easing, a dovish Federal Reserve, the start of vaccine deployment and an easing of European lockdown restrictions – may all be slightly risk-supportive,” suggested BlueBay Asset Management, co-manager of the St. James’s Place Strategic Income fund.
But there are several reasons why investors should adopt a sense of ‘cautious optimism’ about the months ahead.
“The fact that there’s going to be some practical challenges to rolling out the vaccine means we still need stimulus to be in place and that is the critical risk as we move into 2021 – that governments remain committed to supporting people,” argued Kyrklund.
The UK government delivered a Spending Review last week that highlighted the economic damage COVID-19 has inflicted on the economy and the public finances. While committing to support the country in 2021, Chancellor Rishi Sunak also emphasised the need to manage the budget deficit in the years to come following forecasts from the Office for Budget Responsibility that showed a long road to recovery lies ahead.
But fiscal consolidation must be approached carefully and managed alongside other risks, warned Capital Economics. “A no-deal Brexit would set back the economic recovery and an “uncooperative” no-deal could have lasting implications,” they suggested. But “as long as politicians don’t mess it up, we believe the economic outlook from mid-2021 is better than most think.”
Although we have entered the ‘pre-vaccine’ period, we cannot claim yet that we are in a ‘post-lockdown’ state. A revised tier system of lockdown measures in England announced last week brought renewed immediacy to the challenges faced by companies and households over the Christmas period.
The annual shopping event ‘Black Friday’ was somewhat overshadowed by the news that Arcadia, which owns well-known high-street brands including Topshop and Dorothy Perkins, was on the verge of going into administration.
Its collapse shows the scale of the challenges faced by high-street retail, as COVID-19 has wiped out demand and dramatically accelerated the shift to online shopping.
The hospitality industry, which cannot rely on lifeline events like ‘Black Friday’ to boost pre-Christmas sales, is also expected to struggle through December. While it is likely to be bars and pubs that suffer most in Britain, ski resorts across Europe are about to enter another season with COVID-19 restrictions in place.
Some European leaders want a blanket closure of resorts to prevent a rise in coronavirus cases, while others argue that closing them at this time of the year would be catastrophic for regional economies in the Alpines, which rely on the ski sector for revenue.
It can be difficult to relate to the optimism that is visible in global markets when the festive period is approaching and COVID-19 restrictions are still in place. But vaccine developments are still underway, reminding us that the light at the end of the tunnel is still shining.
“We need to remember that it’s easy to get quite gloomy sat here in the UK as we lurch from tier to tier and lockdown to lockdown,” noted Johanna Kyrkland. “But actually, the picture in Asia is very different. China has come out of this very well … so in some senses there are parts of the world that are already firmly on the road to recovery, and I think that’s the ultimate direction for us as well.”
Schroders, AXA and BlueBay are fund managers for St. James’s Place.
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