Although COVID-19 infection rates remain high in many areas of the world, November may come to be seen as a turning point in the crisis with the announcement of three effective vaccines. In addition what was, in spite of President Trump’s protestations, a clear victory by Joe Biden in the US presidential election eased worries over the near term economic outlook and stock markets enjoyed one of their best months in history with many of the weakest areas of the market this year gaining the most. This was reflected by strong performance from Europe and the UK where stock markets returned +14.20% and +12.70% respectively. Impressive gains were also seen from Asian and US markets which have weathered the pandemic much better, markets here returned +8.00% and +11.00% respectively.
The vaccines developed by Pfizer/BioNtech, Moderna and AstraZeneca/Oxford University have been shown to be effective in reducing symptomatic cases of COVID-19 and the UK has now become the first country in the world to approve use of the Pfizer/BioNtech vaccine. With other countries likely to follow, attention will now turn to how quickly the vaccines can be manufactured, distributed and administered on a mass scale. There will be significant logistical challenges here but the vaccines do provide the hope of an end to the worst of the crisis being in sight next year.
In Europe, the significant restrictions imposed to curb the spread of the second wave of the virus appear to have had a positive effect with new infections now falling sharply from their peaks. In the US the situation has continued to escalate though, raising the question of whether stricter restrictions will need to be implemented, perhaps under the new Biden administration, with a related slowing of economic recovery. The vaccine developments do mean however that markets may look through short term economic weakness to better conditions in the future.
Away from coronavirus issues, the main event of November was the US election which passed by without upsetting markets. While the Trump campaign has attempted to mount legal challenges to contest several results the transition process to the Biden administration is now underway.
A less confrontational approach to foreign policy matters can be expected from the new administration including avoiding tariff measures in the trading relationship with China and the EU. The US is also expected to re-join global efforts to combat climate change which should help to drive the green agenda and shape economic policies for recovery in 2021. Control of the US Senate is a key factor in determining what any future fiscal measures may look like and this will be decided on 5 January 2021 with two special one-off elections in Georgia. If, as looks likely, the Republicans manage to win at least one of these votes and maintain control of the Senate, Congress will be divided which would be expected to result in a smaller less ambitious stimulus package than under a Democratic controlled Congress. A divided Congress would also be likely to prevent substantial corporate tax rises and generally less uncertainty for business. Markets have therefore viewed the election result positively.
The second wave of restrictions in Europe has impacted growth with the services sector in particular slowing and economies are set to contract in the third quarter. Negotiations are ongoing to put in place the European Union’s recovery fund and a budget which is intended to provide substantial stimulus. A similar situation in the UK saw the Government recognising that businesses and households will need continued support throughout the winter, including an extension of the furlough scheme to the end of March. Borrowing to provide these measures is expected to reach £384bn this year or 19.40% of Gross Domestic Product, a figure not seen since the Second World War. The Bank of England’s efforts to keep gilt yields at historically low levels has enabled the Government to continue to finance the support measures.
Uncertainty around the length of the COVID-19 crisis is starting to fade which has clearly been a positive for stock markets, in spite of what is likely to be a difficult winter ahead for the economy. Provided recovery can regain momentum corporate earnings should also improve, particularly for those companies most impacted by the virus. Diversification in portfolios remains important however as the global economy will continue to face challenges including higher levels of debt and increased unemployment in many countries.
|2020 Year to Date Total Returns|
|FTSE World ex-UK (GBP)||+13.30%|
|FTSE Actuaries UK Conventional Gilt All Stocks||+5.80%|
|FTSE Actuaries UK Index-Linked All Stocks||+8.90%|
Performance to 4 December 2020
|Bank of England Base Rate||0.10%|
|Inflation (Retail Prices Index)*||1.30%|