Happy New Year. Get up to speed with a roundup of recent events that could shape market sentiment entering 2021.
2021 is here! We hope you enjoyed a joyful and safe holiday season. In true 2020 fashion, it was an eventful few weeks to end the year. In this edition of Top Market Takeaways, we aim to get you up to speed with our take on recent events that could shape market sentiment in 2021—including COVID-19 mutations and vaccination progress, U.S. fiscal stimulus, the Georgia runoff elections and Brexit.
COVID-19: navigating new strains and vaccination progress
Out of the four significant COVID-19 mutations that were reported in 2020, two occurred in December—in the UK and South Africa. In particular, the mutation that originated in the UK is thought to be the most serious change in the virus since the pandemic began. According to a study from the Imperial College of London, this mutation makes the virus significantly more transmissible, or contagious1. While the same study notes the mutation is not believed to make the virus more deadly, the development adds further pressure on healthcare services and workers, as well as the potential death toll, as a greater proportion of the population stands to contract the virus. UK Prime Minister Boris Johnson was quick to announce new lockdown measures throughout the country (the strictest seen yet), and a number of countries enacted travel bans barring travelers from the UK, as the new variant has now been detected much further afield.
Importantly, the vaccines being rolled out are still believed to be effective against these new strains, and governments around the world are racing to vaccinate their populations. In December, the U.S., UK, and European Union all kicked off vaccination programs. In Asia, Singapore kicked off mass vaccination on the 30th of December. And in China, after a few months of vaccinations as part of an emergency usage program, Chinese regulators have approved the Sinopharm vaccine, and a further acceleration towards mass vaccination looks likely in the coming weeks.
Our take: A vaccine indeed represents a ‘light at the end of the tunnel’...but as we noted in our Outlook 2021, it is not a near-term panacea, and won’t be for at least a few more months. Creating the necessary supply is a tall order and has already experienced difficulties—the Pfizer/BioNTech vaccine has run into manufacturing delays, on top of already costly logistics (like a storage temperature of minus 70 degrees Celsius). The Oxford–AstraZeneca and China-made Sinovac vaccine are cheaper and easier to store, but sufficient supply also does not yet exist. Further, actual distribution and demand for the vaccines is fraught with difficulty, due to logistical constraints, reports of side effects, or simply lack of trust, particularly for emerging markets economies. The combination of these issues could see the pandemic linger throughout the year and possibly even into 2022.
Importantly, financial markets are forward-looking and asset prices can reflect future benefits before they actually happen. While additional mobility restrictions may come during the winter months, the very promising developments on the vaccine front may allow investors to look through the near-term disruption and toward the more positive future, as COVID-19’s influence on portfolios will likely diminish throughout 2021. Overall, we are focusing on investments that can work with or without an effective vaccine. These include companies linked to digital transformation, healthcare innovation and household consumption. Sovereign yields will probably rise and yield curves steepen as global activity and risk sentiment improve along with medical progress. This could create tactical opportunities in equities sensitive to interest rates (such as banks). However, we believe the gravity of easy central bank policy will keep rates near secular lows.
A $900bn U.S. fiscal stimulus package: further fuel for the recovery
After much back-and-forth, the phase four COVID-19 relief package was signed into U.S. law on the 27th of December. The $900 billion (4% of GDP) relief deal is the second largest in U.S. history (the first was the CARES Act earlier this year), and is part of a larger $2.3 trillion catchall package that will fund the U.S. government until September 30th, 2021.
The agreement includes expanded unemployment benefits for millions of Americans, direct payments to adults and children, new funding for the Paycheck Protection Program for businesses, rental assistance, and restrictions to several of the Fed’s lending facilities. However, the Republican-backed liability protections for businesses that would have helped guard against COVID-related lawsuits, or the Democrat-backed provisions for state and local aid, were not included. These issues, as well as the possibility to increase the size of the direct payment to $2000 per person, were tabled by the Congress for discussion in 2021.
Our take: The $900 billion package fits squarely within the expectations described in our Outlook 2021 and solidifies to our conviction that the recovery is durable. Further fiscal stimulus stands to add fuel to the already-underway recovery in consumer spending and will go to cushion the impact of rising virus cases and any associated mobility restrictions.
Georgia run-off elections: potential policy impact
The run-off election for the two remaining seats in the U.S. Senate will take place on the 5th of January and could alter the policy mix in Washington. The outcome could have modest implications for markets and the economy. At time of writing, the polls for both races look like “toss ups” and within the margin of error. As with the general election, turnout will be a deciding factor and already turnout appears to be breaking records. Over 3 million Georgia residents have already cast their vote in early voting which comprises nearly 40% of all registered voters in Georgia and surpasses the previous total turnout record for a runoff of 2.1 million ballots cast in the 2008 Senate runoff. Should Democrats win both seats, the party will have a very slim majority in the Senate—with 50 Democrat seats plus the tie-breaking vote from Democratic Vice President Kamala Harris, compared to the Republicans’ 50. Should Democrats lose both seats, Republicans will maintain the majority they’ve held since 2014 at 52-48.
Our take: Even should Democrats secure a slim majority, the impact could be modest. For instance, a narrow Senate majority dilutes the likelihood of major tax changes compared to the more decisive “blue wave” scenario that was touted ahead of the general election. Further, with a fiscal package already passed, the chances of large scale additional stimulus are lower. The initial market moves to price in a “blue ripple” would likely put bond yields slightly higher on the potential of modest additional stimulus in the short-term and infrastructure spending in the long-term. Financials, industrials and other beneficiaries from the Democratic agenda like clean tech could get a boost, while sectors like energy and technology could face challenges on the prospect of potentially tighter regulations, marginally higher taxes, and labor costs.
The Brexit saga: at long last, we have a deal
Four and a half years after the 2016 referendum, the Brexit saga has finally come to an end. The UK and the European Union (EU) agreed on a trade deal on December 24th, only seven days before the transition period was set to expire. On December 30th, the deal was signed in the EU and ratified in the UK parliament by 521 votes to 73.
At its heart, the deal will maintain zero-tariff, zero-quota goods trading between the two powers. The deal also covers a host of other elements of the UK-EU trade relationship, such as fishing rights, environmental and labor standards, government subsidies, border arrangement between Northern Ireland and the rest of the UK, etc.). However, agreement on some key areas, including data flows and authorizations for financial and professional services, are notably missing from the deal. The two sides will further negotiate these matters in 2021.
Our take: This deal is positive for both sides in terms of avoiding an immediate disruption. Sterling rallied, and both UK and mainland European stock markets reacted to the news with a wave of optimism. Yet, we would stress that, for the UK especially, the deal is far from holistic and represents a significant loss of access to the EU market, as well as increased costs for UK businesses dealing with the EU. We are closely watching how future negotiations play out.
Looking ahead, while this deal is not the final chapter in hashing out the UK-EU relationship, it is likely the last time that a Brexit-related deadline materially moves the markets. We think UK equities still look oversold, especially the FTSE 100, which has a significant portion of revenues coming from overseas. Within mainland Europe, we believe both German and Swiss equities are well-poised to outperform their global peers.
Final thoughts:
The one key point we want to underscore in any given year is to have a plan. Before you act, make sure you have a solid, long-range investment strategy that aligns with the goals you have for yourself and your family. Planning holistically is the only way you can truly build—and keep full confidence in—your investment portfolio. As you look for opportunities and meet the challenges that 2021 will bring, we will be there to help you and your family achieve your financial goals.
We wish you all a Happy New Year.
1 Source: Imperial College of London, as of December 31, 2020.
All market and economic data as of January 4, 2020 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.
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