Market update – December 2020

Markets rebound on clear election result and vaccine

Markets have rallied sharply following the US election and news of three successful vaccines against Covid-19. The prospect of a return to normality in 2021 has seen sectors hardest hit by the pandemic – such as airlines and leisure – post significant gains. Bond yields have risen, though still remain at very low levels. Vaccines will not be deployed quickly enough to prevent further economic disruption this year, with widespread restrictions still in place across Europe. There also remains considerable uncertainty about further US stimulus measures. However, the prospect of the end of the pandemic should significantly boost confidence heading into 2021.

Biden set to become 46th US president

Joe Biden won a convincing victory in the US election, although the Democrats did not manage to achieve a hoped-for “blue wave” - winning both the presidency and the Senate. As of early December, Donald Trump has not yet formally conceded defeat but he has suggested that he will leave office without protest. Markets have rallied at what now looks like a clear outcome – avoiding a replay of 2000 when the Supreme Court had to rule on a vote recount. Investors may also be pleased at the prospect of gridlock in Washington. With Republicans still in control of the Senate, it is unlikely that Biden will be able to increase the corporate tax rate. The Senate may also limit his ability to impose tougher regulation on the technology and healthcare sectors, a prospect that had been a concern for investors.

UK grapples with need for fiscal tightening

The Office of Budget Responsibility now estimates that the UK economy will not recover to pre-Covid levels until the fourth quarter of 2022. The Chancellor of the Exchequer’s spending review included significant new commitments to help the UK deal with the economic impact of Covid-19. However, the Chancellor also drew attention to the need to “return to a sustainable fiscal position,” raising the prospect of tax rises and spending cuts. A small step in this direction came in the form of a pay freeze for many public sector workers and a cut to the budget for foreign aid, which will impact many charities operating overseas. Continuing negotiations over an EU trade add to the uncertainty facing the UK.

Portfolio positioning

We expect that gradual economic recovery, combined with stimulus measures from governments and central banks, will continue to support global equity markets. However, we remain prepared for periods of turbulence in markets. Where appropriate, we continue to reduce our UK equity exposure and transition portfolios towards a more global approach. This has served us well in recent months, though we are mindful of the risk that markets with more of a “value” bias could perform better in an environment of greater growth optimism. We also maintain our allocation to gold in many multi-asset portfolios. Despite its recent pullback, we believe it continues to offer valuable defensive and diversifying properties.

The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Registered Office at 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

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James Brennan

James Brennan

Portfolio Director