Please find below our latest investment market commentary, as of the 6th January 2021. We continue to provide regular updates and further investment updates and observations to help support our clients.
Article has been written by Iain Lightfoot, Joint Managing Director, Armstrong Watson Financial Planning and Wealth Management and Richard Cole, Fund Manager at Future Money Ltd.
2020 was a year dominated by Brexit, the US election, and of course, Covid-19. As we start 2021, the coronavirus is still of course front and centre, but UK/EU relations and American politics will likely fade from our focus. This time last year the global economy appeared in good shape, with continued economic growth and low unemployment. Yet, things quickly turned for the worse with the global spread of the virus as stock markets experienced rapid losses in February and March and economies faced unprecedented lockdowns throughout the year. Conversely, this year may be beginning with bleak conditions, yet there is the potential for significant recovery should the vaccine roll-out progress well.
If vaccines do prove effective, then the case for economic recovery later this year is very strong. Yet in the shorter term conditions will remain extremely difficult for business, with renewed lockdown conditions once again curtailing our ability to get out and spend, which will likely result in a “double-dip” recession (even if the second contraction proves smaller than the first). Aid continues to come from the government, including the continuation of the furlough scheme and the recently announced £9,000 grants for retail, hospitality and leisure businesses. The Chancellor has also promised to review support packages in the March 3rd Budget, suggesting that more support will be forthcoming. While these measures will not prove sufficient to save many businesses, on a national level such schemes remain vitally important and powerful in keeping the majority of the economy afloat, so that when the opportunity arises, the taps of economic activity can be opened once again.
Despite there being cause for optimism, the success of the vaccination effort is not guaranteed, with the challenge of distribution and delivery set to be a major test on the logistical side, while on the scientific side there is of course the threat of virus mutations reducing the efficacy of the current vaccine options. Given such caveats, rampant optimism for later this year is perhaps unwise at the current time. Yet with indications so far suggesting that neither of these issues will be insurmountable, moderate confidence that the pain of the coming months will merely be temporary (at a national level) does not feel entirely out of place.
Returning our attention to Brexit and with a trade deal now in place between the UK and the EU, the threat of widespread disruption from a no-deal departure appears behind us. Yet, that is not to say the issue is entirely resolved. With no provisions for the trade in services in the deal, negotiations and uncertainty will continue over the rules of engagement for the largest part of our economy. The fate of trade in the financial services sector, for instance, is still unclear, with talks aimed at achieving a memorandum of understanding on cross-channel trade likely to continue over the coming months. Within the trade of goods, as well, there remains uncertainty, as the implications of increased border checks and restrictions take place. So far there have been complaints from a number of European online retailers exporting to the UK about new UK tax requirements which has led to a number of firms pausing or cancelling trade with UK customers. There is also growing concern amongst the food and drink industry over rules of origin provisions blocking supply chains which start in the EU, pass through the UK and back to the EU.
As such, the realities of increased red-tape when trading with our largest partner are likely to cause some frictions. Yet with the most disruptive “no-deal” path averted, confidence is likely to improve amongst both domestic and international investors who have been highly nervous of the UK market since the 2016 EU referendum. Pound sterling and domestically focused equities performed well as the deal took shape in late December and while Covid is likely to continue to dominate market sentiment over the coming months, once this can be overcome, it is likely that Brexit risk will no longer be a major factor for markets.
Finally, looking at the US and while markets rallied following the November 3rd presidential election with Joe Biden considered a more calming influence on global events, a question mark over the extent of his mandate has endured with the balance of power in the Senate not being clear. However, with yesterday’s election in the state of Georgia, at the time of writing it looks like both seats will be won by the Democratic candidates. As such, the “Blue Wave” of Democrat control of the Presidency, House of Representatives and the Senate looks complete, albeit by the thinnest of margins. While not hugely important for geopolitics, as President-Elect Biden will not need support of the Senate for most international policy, it is important for the shape of the domestic economy and therefore is likely to have an impact on international markets. With the Senate now expected to be largely in support of Biden’s domestic agenda, the prospect of more generous fiscal stimulus has grown. This is likely to accelerate the US’ economic recovery and so seems likely to provide a strong boost for economically sensitive companies, potentially creating a turning point in the market trends that dominated 2020.
Our philosophy is that no one can predict the peaks and troughs of financial markets with any accuracy and it has always been extraordinarily difficult to time when the best (peaks) and worst (troughs) are. Timing the stock market is extremely difficult, so we believe it is best avoided. Volatility is a part of investing which is why we always take time to understand how much risk any client is prepared to take before investing. We also generally believe in the benefit of diversification of assets to help manage some of the extremes of the markets. Taking a diversified multi-asset approach means that some assets can fair better in different market conditions as they are more defensive assets such as bonds, whereas during periods of growth equities tend to fair better.
Armstrong Watson, in addition to our full range of accountancy services, also have access to fund management expertise from the Future Money asset management team, as well as independent expertise from the wider market. We are able to use this to help provide insight, commentary, advice and support to our financial planning and wealth management clients.
A key aspect of our investment philosophy is that it is time in the market not timing the market, which is usually the best approach.
At Armstrong Watson, our quest is to help our clients achieve prosperity, a secure future and peace of mind. We believe that for those people who are considering taking financial advice and want to take advantage of all existing reliefs and allowances now may be a good time to do so
Please note that the contents are based on the author’s opinion and are not intended as investment advice. Past performance is not a reliable indicator of future performance. The value of investments and the income derived from them can fall as well as rise and investors may get back less than they invested
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