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As I write we retain our bright expectations for 2021, just as we have been once again reminded why we were so pleased to leave 2020 in the rear-view mirror – a spiralling pandemic and a dysfunctional American president. Yet markets continue to be forward looking, as both accommodative central bank policies and a huge vaccine roll-out remain firmly in place, so we expect markets to move forwards from any short-term volatility.
Our three key risks to the markets in the latter part of 2020 are receding. Brexit is done and there is a free trade deal between the European Union and the United Kingdom. Trump is almost gone having finally conceded defeat the day after the Democrats gained control of the Senate and the world was shocked by the mob-antics of his supporters in Washington, D.C. This leaves COVID, to which we hope global vaccinations will win out.
Joe Biden has significantly more capacity to push through key parts of his agenda following the capture of two new Democratic seats in Georgia, resulting in a 50/50 split. From January 20th, Kamala Harris (Democrat) will be Vice President, and will bear the power to influence any tiebreaking vote, thus giving Democrats control of the chamber.
We know where Biden stands in terms of policy, and now with a firmer grip on the Senate we can anticipate the blue agenda to be implemented more efficiently, including an increase in fiscal spending and, to a limited extent, higher taxes. We would expect him to move quickly with regard to the latest stimulus cheques – a primary focus in the Georgia elections – and in providing aid to local and state governments.
One important implication of the Democrats gaining control of the Senate, in the wake of the Georgia run-off elections, is that Biden’s ambitions on greening the American economy have more chance of being translated into actual policy. This should mean more investment in renewable energy, an increase in electric vehicle use and production and a more rapid energy transition generally across major sectors of the economy. The strong performance of stocks related to the clean energy theme is likely to continue as a result. Following the November election, it was widely reported that President Biden would take the US back into the Paris Agreement and update its emissions reduction targets from those last provided by the Obama Administration.
Seeing the back of Brexit and Trump removes two sources of anxiety that have weighed on investors for some time. Now we need to see progress against the pandemic. On that front, the number of vaccines administered across different countries will become an important metric of markets. For once, the UK seems to be doing reasonably well on that front, but much more is needed.
A successful vaccination programme reduces the size of the potential host population for the virus. So even though transmission rates appear to have accelerated in many countries – not least because of mutations to the virus itself – there should also be an acceleration of progress towards herd immunity in the coming months. The R rate might remain high but reducing the number of infectible people will have an impact on both the absolute numbers testing positive and the absolute number of people requiring hospital treatment. This is especially the case if the most vulnerable are vaccinated first. Quite possibly we could see a very steep drop in new cases, hospitalisations and hopefully deaths in the first quarter.
If that positive scenario does emerge then what follows will be the lifting of social mobility restrictions and the re-opening of sectors of the economy that have been hit by rolling closures over the last year. This is not likely to happen quickly given the risks that will remain, especially those associated with travel, but things should be a lot brighter than they have been. Pent-up consumer and investment demand could contribute to a boom in economic activity in the second half of the year. The anticipation of that should support investor confidence, flows to risky assets and a further improvement in corporate earnings momentum.
While there is the potential for an economic boom and therefore a good year of returns from stocks, there are plenty of risks and reasons to be watchful. The first is that the pandemic remains extremely damaging to human and economic life. We need to see infection rates peak, as optimistically predicted in today’s news, less people getting ill and a critical mass of vaccinations being reached. If there are doubts about the efficacy of the virus in the field, logistical or bureaucratic disruptions to supply or reasons why significant numbers of people refuse to take it, then sentiment could be undermined. An IPSOS poll undertaken before Christmas in a number of countries suggested that between 60% and 80% of people polled would get the vaccine when it became available. Worrying, in France, the poll number was just 40%.
Once again, any such threats will be countered by central banks and the combination of Biden’s progressive ambitions (if not policies enacted fully), Yellen at the US Treasury and Powell at the Federal Reserve tells us the US policy framework will remain supportive for the economy and, hence, markets. I suspect the same goes for Europe.
I very much hope that you are coping as well as can be expected with the third lockdown and, as always, please do contact us if you need anything further.