Recovery, restrictions and a whole lot of rhetoric
After the harsh shock of Covid-19 between February and April, the global economy managed to spring back to life over the summer. The economies of most countries showed solid signs of recovery between May and August as lockdown restrictions were lifted. But various factors conspired to halt this encouraging progress; new outbreaks of the virus, rising tensions between the US and China, the nail-biting US presidential election, Brexit – all while governments and central banks grappled with how to get us through the crisis. Markets were understandably volatile during all of this, rising one week, falling the next, on expectations of recovery, restrictions, or political rhetoric.
So what next? It’s a difficult question for anyone to answer. Considerable uncertainty remains for communities, companies and economies. But what we can do is to consider some of the big drivers of market performance and what investors can do to help navigate this bumpy road.
What could the US election result mean for markets?
The 2020 US presidential election will certainly go down in history as one of the most controversial. Months of heated campaigning, Donald Trump’s claims about illegal votes and the ‘too close to call’ counting of votes – no wonder we’ve been glued to our newsfeeds.
After such uncertainty, many markets bounced with relief on the first day following news that Democratic candidate Joe Biden had won. Termed the ‘Biden bounce’, shares across Asia made healthy gains with Japan’s market reaching close to a 30-year high. China’s market also rose as investors there are hopeful that the Biden win will improve relations between the two economic powerhouses, making it easier to agree trade tariffs and technology policy. However, the differences between the two run deeper than a change of President can solve. Relations between the two will therefore remain a focus for investors.
But who will hold power in the White House is just one part of the story. The second big question for economists and investors is who will hold power in both the House of Representatives and the Senate? Without the Democrats having control of both houses, Biden may struggle to pass policies that could support everything from economic recovery to tackling climate change. There are many examples over the decades of US political stalemate on important legislation. This question won’t be finally resolved until after the Senate run-off in Georgia in January.
If the Democrats secure control of both houses, we would expect a generous short-term Covid support package, followed by legislation to raise taxes. These initiatives could significantly boost the US economy. However, it looks increasingly likely that we’ll see still significant government spending, even in the case of a split Congress.
The size and extent of spending may also have implications for sector and stock performance within markets, as well as for markets themselves. Companies with steady and persistent prospects of growing their profits (growth stocks), for instance technology companies, have been outperforming companies whose profits are more influenced by whether the economy is growing or contracting (value stocks). The former have been the ‘darlings’ of global stock markets for many years. But some of the more recent share price moves suggest that investors are starting to nibble at the latter.
However, it’s important to remember that many of the companies which find themselves described as ‘value stocks’ are in challenged industries such as retail, airlines and hospitality. The impact of Covid has not been the root cause of their problems – it has merely fuelled existing trends. These three industries and others were struggling before the pandemic and the trends that caused this will still exist after it. So caution is merited.
At the time of writing, Donald Trump continues to threaten legal action over the result. Uncertainty continues for now. But whatever happens early next year will have a potentially huge impact on the outlook for the US economy. And ultimately, this will affect the growth of economies and industries across the world.
Brexit: a critical juncture
A lot has happened since the UK left the European Union (EU) on 31 January this year. While the pandemic has dominated headlines, hearts and minds, Brexit has been rumbling along through its transition period. During this time, agreements, rules and regulations have stayed the same. But we’re now at a critical juncture; the UK and EU need to agree a trade deal by the end of 2020. If they don’t, they’ll have to trade under the World Trade Organisation rules and this could mean tariffs on goods.
The good news is that the headline commitment to tariff- and quota-free trade remains intact. This could, if mutually beneficial agreements can be reached, support key industries such as cars, chemicals and pharmaceuticals. However, if the EU insists on more restrictive rules, it could leave UK producers (particularly in the auto sector) with a clear disadvantage.
Different industries will look forward to 2021 with hope or concern, depending on what’s agreed (or not) by the end of 2020. But what is certain, at least in the short term, is that the outcome won’t be as economically advantageous as the status quo.
The race to find a vaccine
On the same day as the ‘Biden bounce’, markets also reacted to hopeful news we’ve all been waiting for. Pfizer and BioNTech announced that the phase 3 trial of their vaccine showed it to be 90% effective in treating Covid-19. European markets, which were open at the time of the announcement, leapt for joy. The FTSE® 100 jumped 5% and stocks hardest hit by the pandemic, such as entertainment and airlines, saw gains. It’s a good example of the reactive and sentiment-based nature of markets – moving on the anticipation of what’s to come. That said, the extent of the bounce in some share prices is more of a reflection of how close investors felt they were to no longer being viable without the good news of a vaccine.
The vaccine still has to go through regulatory assessment, be produced and distributed. It’s a hugely complicated and time-consuming process. But as we get more clarity on how the vaccine will be rolled out, we can all look to the future with more clarity and a sense of hope.
The Pfizer vaccine is just one of several in the final stages of human trials. In particular, all eyes are on progress of the Oxford University/AstraZeneca vaccine, about which we should hear further news soon. None of the other candidates have the same manufacturing and distribution capacity of AstraZeneca. The European regulator has stated that it will begin reviewing AstraZeneca’s data ahead of completion to help speed up the approval process – an unprecedented move.
At Aberdeen Standard Investments, we believe that at least one is likely to be approved by the end of 2020 (this being more optimistic than many forecasts), and almost certainly by the middle of 2021 (closer to consensus).
Economies are exhausted but haven’t yet collapsed
After the initial virus shockwaves, global economies showed indications of recovery as more of us returned to working, shopping and socialising. But the new Covid outbreaks and subsequent social restrictions halted the momentum. Overall, the global economic recovery hasn’t petered out but it is losing steam. At Aberdeen Standard Investments, we’ve lowered our forecast for economic growth next year; we now expect that it will rebound to 6.0%. What does this mean in real terms?
It means that we expect the health of global economies to:
- be well below their pre-pandemic trend
- take years to fully recover
- be left with sizeable and permanent scars
On one hand, the outlook for a vaccine has improved and, once realized, will help improve the outlook for people and economies. On the other hand, government support, at the level we saw early in the crisis, may be fading.
Investors will need to delve deeper and diversify
Each country will be affected to varying degrees depending on how well the virus is managed, how their government and central bank responds, and how the vaccine is rolled out. As we progress through this crisis, it’s likely these variances will become more pronounced.
We expect the same difference in fortunes to happen across industries and market sectors. As I’ve mentioned before, the pandemic has and is affecting companies and industries in different ways.
The significant gaps opening up between countries, industries and companies means investors need to delve deeper and diversify. It’s about avoiding being exposed to any one industry or country, economic scenario or trend, and investing in the most resilient companies. The volatility of markets over the past few months has been (another) reminder of the importance of this.
But it takes research. Lots of it. It’s now more important than ever to understand every aspect of a company’s health. This includes its stability, the strength of its balance sheet and cash flow, and its management team. Is the company you’re investing in able to continue to grow and reinvest in its business over the long term?
There’s a huge amount of uncertainty and factors for investors to consider. And it’s human nature to react to short-term events. At times like these, it helps to take a step back, check your investments are diversified and aligned to meet your long-term goals.
Did you miss last month’s market outlook?
You can read Richard’s special feature ‘What does climate change mean for investors’ here.
The information in this article should not be regarded as financial advice. Please remember that the value of investments can go down as well as up and may be worth less than was paid in. Information is based on Aberdeen Standard Investments’ understanding in November 2020.
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