Friday, 18th of December 2020
“You never know who’s swimming naked until the tide goes out.”
– Warren Buffett
________________________________________
Global equity markets have returned to the positive trajectory they were on before last week’s wobble. Ahead of the Friday session, the US benchmark S&P 500 Index had gained +1.6% for the week, the MSCI Emerging Market Index was up +1.2%, and the Euro STOXX 600 Index had surged a whopping +1.8% (and it has since added to that tally this morning). Two important pieces of news are responsible for the change in market tone. Firstly, reports suggest that despite all the huffing and puffing last week, the UK and the EU are indeed now edging towards a deal on Brexit; and, secondly, the Congressional standoff over the terms of further fiscal stimulus in the US appears to have broken in favour of Senate Majority Leader Mitch McConnell’s proposal for a skinny agreement that parks the most controversial issues for now. In conjunction with these two political drivers, markets were also buoyed by better-than-expected Eurozone numbers, solid China data, and a dovish Fed. All in all, therefore, all this week’s big headlines were supportive for risk.
However, before you break out the champagne, don a festive jumper, and tune out early for the holiday season, we feel obliged to recommend that you keep your wits about you this year. Uncertainty ‘infects’ financial markets today, and an unwelcome Christmas correction amid seasonally thin liquidity remains a distinct possibility as cases of covid-19 continue to rise in parts of Asia, America, and Europe (where lockdowns are making a comeback). Although not front-page news outside the UK, a dangerous new strain of the coronavirus was also discovered in SE England this week. So far, there is no evidence that our current crop of vaccines will be ineffective against this virus variant (which is one of many). But what has scientists concerned is that one mutation (N501) makes the virus much more infectious. If it now spreads rapidly around the world and begins to dominate the coronavirus landscape, harsh restrictions could be needed sooner (and for longer) when cases begin to spike in future; and this suggests that a more cautious outlook for the first half of 2021 at least is warranted. Moreover, the appearance of this mutant strain is a reminder that the pandemic is far from over – and that it could yet take a turn for the worse. Many experts are concerned about the frequency and fundamental nature of these mutations; and when vaccines are in widespread use that will tilt the evolutionary dynamics towards the emergence of resistant viruses. This is by far the biggest risk we see for next year. Our base case is not for 2021 to be another 2020 – not least because the world will simply have to learn to live with this disease if it makes a roaring comeback post-vaccine roll-out – but the advent of seasonal coronaviruses is a clear tail risk for portfolios. Hedges in the new year may be needed, given the bullish consensus today.
Moving swiftly on to greener pastures, the news became decidedly less downbeat on Brexit this week; and GBP/USD has shot back up above 1.35 in response. Although we did not join in with the chorus of concern last week, we are glad that both sides now appear to be moving. Fish and state subsidies are still outstanding, and ‘nothing is agreed till everything is’ but failure at this stage seems improbable. The EU has set Sunday as their new deal deadline, ostensibly to allow the EU Parliament sufficient time to scrutinise and ratify any legal text. However, if there are two things we know about these negotiations, they are (1) that deadlines are not immutable and (2) that no one really cares what the EU Parliament has to say about what the Commission and Council have already agreed with Britain. Therefore, an extension to talks is not unlikely – with a legal fudge found to ensure a smooth exit at year-end regardless of when a deal is reached. We remain confident in having our UK equity overweight for now. Indeed, given relative valuations, it is one of our highest conviction positions as we enter 2021.
The other big news item this week is that the US Congress is approaching a compromise package in fiscal stimulus talks. Senate Majority Leader Mitch McConnell’s proposal of a ‘skinny deal’ to cover the least complex issues first finally seems to have been accepted by Democratic leaders. The controversial issues of (1) federal aid to state and local governments (a Democratic priority) and (2) liability protection for companies being sued by their employees and customers who catch the virus (a Republican priority) have been parked for now. Bloomberg is reporting that the current bill proposes c.$900bn in assistance overall, including $600 worth of direct payments to each citizen, supplemental unemployment insurance worth $300 per week, a separate aid package for small businesses, and c.$17bn for the stressed airline sector. Something has to be agreed to avoid another government shutdown, and the proposal would go some way towards addressing concerns that the US is not providing the necessary level of economic support to weather this storm. If agreed, this should be a boon for equities as we head into the last mile of 2020. Liquidity is always welcomed by investors.
Finally, we would like to wish all our readers around the world a very pleasant holiday and a good rest free of Covid!
There will be no newsletter next week, but we will be back with all the latest news on January 8th next year.
In March's news roundup, we look at some of the big deals and trends in the London office market, which has seen a very active month driven by the return of private equity (PE) buyers seeking to take advantage of discounted pricing. We highlight some of the biggest deals and what these mean for the capital.
As families expand, diverse perspectives, voices, and expectations emerge. Each generation brings unique dynamics and values, shaping the family business's future. We offer three key considerations for grooming future leaders within the family business context.
In this market update, we discuss the strength of the equity rally this year, the end of ultra-easy monetary exceptionalism in Japan, and the investment case for gold.