Capital Markets Update

• In a nutshell
• Vaccine rollout begins
• Brexit has been agreed

In a nutshell

Risk assets continued to grind higher throughout December despite increasing lockdowns in the UK and other parts of Europe. They were supported by more vaccine regulatory approvals and the beginning of mass-rollout. Brexit also appears to be mostly agreed, a relatively ‘hard-Brexit’ outcome was seen as a small positive by markets when it seemed that no-deal was a very real possibility. Unsurprisingly, Sterling strengthened against most major currencies, on the prospect of avoiding a no-deal outcome. In GBP terms, emerging market equities delivered the strongest returns as it appears that China has the virus under control, whilst US equities lagged. In fixed interest emerging market debt investments performed strongest, with high yield bonds also doing well.

Vaccine rollout begins

In early December, the UK became the first country to approve the coronavirus vaccine from Pfizer and BioNTech, and grandmother Margaret Keenan, 90, became the first patient to receive the jab. But less than two weeks later, after a rise in cases due to a new mutant variant of the virus, Boris Johnson effectively cancelled Christmas for almost 18 million people in London, south-eastern and eastern England with a two-week lockdown while households were told they should only gather for one day in the rest of the country.

Fears about the highly infectious new strain prompted European countries to halt flights and ferry crossings from the UK and the Government's Cobra civil contingencies committee discussed how to maintain freight flow to and from the UK. The mutation has increased fears that the virus could achieve “vaccine escape”, but the current scientific consensus is that this remains unlikely.

The two opposing forces of rising cases numbers (triggering tighter lockdowns) and population immunity from vaccinations look set to cause turbulence over the beginning of 2021.

Brexit has been agreed

On Christmas Eve, a Brexit deal was finally agreed with the EU, after months of intense talks bringing to an end a political stalemate which saw off two Prime Ministers. Fundamentally this is a much better outcome than no-deal (or “reverting to WTO terms”) which was becoming an all too likely possibility with deadlines being continuously missed. The outcome is still a relatively ‘hard’ outcome and quite a few details have yet to be agreed.

On the positive side trade will continue tariff free for goods and some services. This provision alone will mitigate much of the pain of separation. The agreement allows Britain freedom from EU product and labour rules as well as the environmental regulations with which it had to abide as a member. It not only allows London to write its own regulations, but it allows Britain to forge new trade deals with other nations, such as the United States and Japan, without having to insist on EU rules. One major caveat is that the EU has the right to end the tariff-free arrangements if in Brussel’s judgement Britain has begun to use “unfair” trading strategies. Since tax and regulatory policies are all subject to such judgements, London in the end may have a lot less freedom to make policy or frame trade deals than it might seem on the surface.

The deal does not give British finance the free access to members of the EU it had when Britain was a member. In anticipation of this disappointment, many British financial firms had already established independent operations on the continent and moved jobs and income accordingly. This may prove to be an economic hole that it will take Britain a long time to fill.

Arrangements for Ireland probably constitute the biggest setback in matters of sovereignty. The province of Northern Ireland will remain in the EU’s custom area and so avoid any need for border checks, but to make that work, the agreement also insists that Northern Ireland also has to abide by broad EU regulatory standards. Effectively, a part of the UK will lie under the laws of a foreign entity.

Multi Manager Team Views

We ended the year with a fairly balanced outlook. While there is lots of positivity in terms of vaccines and potential for the global economy to improve, that must be balanced against high valuations across all asset classes from government bonds through to equities. Medium term it looks as though monetary and fiscal stimulus will be supportive and prevent too much negativity from creeping into markets. However longer term, there remain ominous questions as to how ballooning government deficits and debt burdens will be dealt with and what impact that will have on world economies.

Important information:

The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest. Past performance is not a reliable indicator of future results. Personal opinions may change and should not be seen as advice or a recommendation.