Coronavirus (COVID-19) Final 2020 Update
Shortly after our last update, following a lacklustre period for share prices, it was announced on 6th November that Pfizer BioNTech’s vaccine was over 90% effective, prompting a rally in global equity markets. This was led by the UK which rose 14.34% from 3rd November to 17th December outperforming the MSCI World index which rose 9.74%. (Source: FE Analytics). Optimism about a return to normality meant that those sectors which had suffered the most during the pandemic saw huge demand for their shares. Our preferred value fund, Man GLG Undervalued Assets, advanced an impressive 24.27% over the same period.
Since then, however, details of a surging mutant virus strain, more prevalent in the UK it seems than elsewhere, have emerged, plunging over sixteen million Britons into new Tier 4 restrictions and upending the Christmas plans of the entire country.
So how do we take stock of this extraordinary year and the stock market reaction to it?
All major markets except for the UK have enjoyed double digit returns this year which at face value seems at odds with the economic reality of a global lockdown induced by Covid-19. The S&P 500 has risen 15.18% to yesterday’s close, followed closely by MSCI Emerging Markets’ return of 14.40%. The FTSE All Share, by contrast, remains down 11.03% but has also recovered considerable ground since its peak to trough decline of over 35% when news of the virus first unfolded. With the acceleration of consumer trends already in place as the digital economy transforms everyday life it is not, on reflection, surprising that the technology behemoths that make up such a significant part of the US market led that market higher. Another winner, as efforts to combat climate change continue, Tesla, the world’s leading electric car maker and now largest by value, joined the S&P 500 last month and although it promptly fell by 6%, this is a mere blip in the context of the seven fold return enjoyed by its investors this year.
The US general election, which already feels like a lifetime ago, was a drawn-out affair, with confirmation that the Democrats had garnered enough electoral college votes to win, taking almost a week to be verified. Whilst Donald Trump continues to contest the results, most observers let out an enormous sigh of relief, but it was not as convincing a win as some had forecast which has implications for how much fiscal expansion a Biden/Harris administration will be able to enact. What is interesting is that many market commentators who had seen the upside in a so-called Democrat blue wave were nevertheless quick to point out, in its absence, that markets like stability and that a divided legislature will provide that. It seems that most investors are looking for reasons to be bullish and will change the narrative accordingly.
In the UK, it appears to be a rather different story, unfortunately, with the Brexit negotiations continuing not only up to the wire but above and beyond it. Hopes of reporting the successful conclusion of a deal by now have sadly evaporated, at least at the time of writing. However, amidst all the doom and gloom of daily prime ministerial press conferences highlighting accelerating Covid case numbers, hospital admissions and backed up lorries on the M20 there are reasons to be cheerful. The UK vaccination programme is well underway and it seems that every time consumers are given a chance to spend they do. Spending patterns may be shifting but whilst we have every sympathy with those individuals and companies negatively affected by the restrictions, most notably those in the hospitality, travel and leisure industries, others have been able to amass higher levels of saving which makes a spending splurge in 2021 more likely. Moreover, companies are adapting and those which survive will likely emerge stronger, standing to benefit from lower competition at the same time as increased demand.
It seems clear that investors are looking through the ravages of the pandemic and have started to discount a global recovery next year. In many ways this is the classic start of a new business cycle but in other ways many of the financial conditions that pertained pre-crisis are still in place. Inflation is low, central bank policy remains accommodative and governments around the world are committed to spending whatever it takes to keep their economies afloat and as many of their citizens in work as possible. Against this backdrop with bond yields remaining very low, equities continue to offer value (especially outside the US) and the prospect of inflation beating returns. As ever, the path is unlikely to be straight. No doubt, depressing headlines will dominate sentiment from time to time but if there is one lesson to be learnt from this year, given the precipitous decline and extraordinary recovery in global equities, it is not to panic and to remain fully invested for the long term, across different market cycles.
It has been a very challenging year for many people, in more ways than one and we would like to wish all our clients a Merry Christmas and a healthy and happy New Year. As always, if you would like to discuss anything further then please do get in touch, otherwise we look forward to speaking to you and eventually, we hope, seeing you face to face in 2021.
22nd December 2020
RiverPeak Wealth Limited