Don’t look back in anger
From an investment perspective, 2020 will be defined by both the worst global pandemic in a century and the end of the most controversial US Presidency in history. For UK investors, we can add Brexit to those two other seismic shifts in the investing landscape.
By Q2 of 2021, we can hope to have an undisputed sitting US president, the vaccination of all UK citizens in high-risk groups, and some further clarity on what a post-Brexit landscape looks like for investors.
In pure investing terms, it does not matter where an individual stands on any of these issues. A Trump-supporting, (EU) Remainer, who believes Covid-19 is a power grab by big government has the same investing landscape as somebody who supports Joe Biden, thinks the UK will be better off outside the EU and believes the government is doing its best to protect us.
In particular, and as it briefly did in Q4 of 2018, the UK equity market once again looks, to us, to be a very attractive investment opportunity. The Pound either side of the recent deal to leave the EU has been relatively stable, and in the first few days of January the UK FTSE 100 was the best performing developed equity market.
Whilst many problems remain to be resolved between the UK and the EU; it seems reasonable to hope the most contentious one has now been settled.
The temporary ‘new normal’
Like many other countries the UK has to live with lockdowns and, broadly, citizens have to comply with the government rules whether they support them or not. The third UK lockdown was greeted overall with a grudging acceptance that the case numbers were accelerating at an alarming rate and drastic actions were probably required.
Whilst this has a regrettably negative effect on our daily lives, and issues such as holiday aspirations, the stock market’s impact are not necessarily negative. After the initial shock of an event such as the Covid pandemic, equity markets tend to look through any short-term disruption, and participants try and pick the next winners. Whether we like it or not, markets are impervious to the human condition.
There is potentially more pent-up demand than ever before for goods and services that have been hardest hit by Covid, and many people have been saving money over the last 12 months which they want to spend on the things they have been deprived of. This means long term value potential in specific sectors and certain countries in particular.
Around the globe
As ever, the global economy had issues before the arrival of the worldwide pandemic. However in some ways, at least in the shorter term, it has enabled governments and central banks to look through them and concentrate on the here and now.
Although it seems to us like the US will spearhead the use of profligate money spending, they will be by no means alone. Politicians love to be loved and giving money away in any guise is usually a vote winner.
With this in mind, 2021 will likely bring more of the same in terms of global economic policy. Countries with larger debt piles have indicated they will continue down the same road, supporting risk assets, but with one important proviso. Ever since the US (and others) effectively abandoned any pretence of expecting to pay down their debt in Q4 2018, markets have assumed the world’s central banks have their back. This assumption is likely to be challenged from time to time, the latest example being the early days of the pandemic and the ensuing economic and market chaos.
Further down the line as we emerge from the pandemic, we believe areas such as mining, oil, and bank stocks will be some of the best performers, despite this view potentially clashing with the prevailing ESG orientated agenda. On the flip side, some of big tech names that have significantly benefitted from the newly necessitated ‘working from home’ culture, could find themselves under increasing pressure.
What to expect from Biden?
We expect the Biden administration to officially adopt many facets of Modern Monetary Theory (MMT) and materially weaken the dollar. In the event of another catastrophe, the dollar will probably revert to its haven status but that won’t change the medium-term trajectory for the world’s reserve currency.
This super loose monetary fiscal and monetary policy regime will be a supportive backdrop in many emerging markets both in Asia and elsewhere. We expect the combination of policies to be inflationary as the money will go into the hands of people who will spend it, and it will be good old-fashioned supply and demand.
With the Democrats controlling both the House and the Senate, we expect a large increase in US spending with little or regard to the mounting debt pile. As with Brexit and the government’s response to the pandemic, personal opinion can sometimes blindside investors to the opportunities.
We also expect infrastructure, and sectors and stocks which fall under the loose banner of a green agenda, to benefit from the new administration. We don’t expect it to be plain sailing concerning the ongoing trade war with China, but we can expect a greater degree of consistency, limiting market volatility.
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It does not purport to be all-inclusive or contain all of the information which a proposed investor may require in order to make a decision as to whether to invest or not. Nothing in this document constitutes a recommendation suitable or appropriate to a recipient’s individual circumstances or otherwise constitutes a personal recommendation.
Past Performance is no guarantee of future performance. The value of an investment and the income from it can fall as well as rise and investors may get back less than they invested. Risk factors should be taken into account and understood including (but not limited to) currency movements, market risk, liquidity risk, concentration risk, lack of certainty risk, inflation risk, performance risk, local market risk and credit risk.
IAM 12.1.21
