Monthly Market Update – December

It seems only right that a chaotic 2020 – dubbed the worst year ever by Time magazine – ended with a bang rather than a whimper, with a large part of the UK back in lockdown and a new strain of the virus seemingly out of control.

Against this backdrop came the endgame of the four-and-a-half year Brexit fiasco, with the UK and EU unveiling a deal on Christmas Eve that should help markets and sterling start 2021 on firmer footing and finally allow companies to plan ahead and invest for the future. Concerns around a no deal, with fishing rights apparently the sticking point, gnawed at sentiment for much of the month and after weeks of talk about an ‘Australia-style’ deal, it took a Canada-style arrangement to end the UK’s 47 years as part of the European Union.

While there will obviously be a transition period as the UK diverges from the world’s largest trading bloc, the hope is that the country can finally move on to other things, whatever challenges we may face as a newly ‘sovereign’ nation. Top of the pile is obviously finding a way out of Covid-19 and despite the lurch back into national lockdown and concerns over how the virus is mutating, vaccine developments provide reasons to be positive in 2021, provided countries find an effective distribution method. Given this, we added more to US smaller companies over the month, with improving news giving greater visibility and supporting risk assets.

Equities ended the year close to record highs, although the UK was an obvious exception to this exuberance, suffering its worst year since 2008 with a 14% decline. Lingering Brexit concerns would seem the obvious culprit for this, but the make-up of the UK market and economy – with relatively high exposure to banks and energy, which struggled through the pandemic, and less to high-flying tech companies – is also to blame.

Overall, the traditional December rally was again in effect (albeit driven by a Santa wielding vaccine-filled syringes rather than a sack of presents), and it is difficult to conceive of the S&P 500 more than 15% up over such a tumultuous year, particularly given the rapid bear market decline in March. Or not, perhaps, if we consider Apple’s 80% share price appreciation over 2020 and – albeit only joining the index in December – Tesla’s 800% rise, highlighting the massive tech skew in this year’s numbers.

On the policy front, European Central Bank President Christine Lagarde announced plans to extend its Pandemic emergency purchase programme (PEPP) by another €500 billion until March 2022, by which point she believes the eurozone will have achieved the herd immunity needed for the economy to operate normally. Meanwhile, the Federal Reserve and Bank of England both remained in their own particular forms of limbo when they met in December, with Brexit negotiations going right up to the wire and political infighting in the US, including January’s runoff elections in Georgia, delaying a long-awaited stimulus package.

BoE officials delayed any rate cut until the Brexit situation was clear and markets are pricing in a one-in-four chance of a reduction in 2021 to help the Covid recovery, which would take rates into negative territory for the first time. If the outlook for inflation weakens further, the Monetary Policy Committee said it stands ready to take whatever action is necessary to achieve its remit, which suggests negative rates are very much on the table. Across the Atlantic, the Fed opted against increasing the bank’s purchases of US debt and mortgage-backed securities or changing the composition of the programme, although it said it would continue until there is ‘substantial’ progress to recovery, which some market watchers suggested is a tacit extension.

This stimulus package did finally come later in the month, with Democrats and Republicans agreeing on the second-largest relief bill in history at close to $900 billion (after March’s $2.2 trillion Cares Act), including more help for small businesses and direct payments to American families. Continuing with his scorched earth approach to his last days in the White House, the outgoing president initially blocked the Bill before decamping to Florida and the golf course where he eventually signed and avoided a government shutdown.

As expected, Trump is not leaving office with his head held high, persisting with the argument that the election was stolen from him, there was widespread fraud and he still has a chance to win. He added his voice to a Texas Supreme Court lawsuit over December, with a total of 18 Republican states joining forces in an attempt to invalidate Joe Biden’s victory, but once again this was quickly and summarily dismissed. Showing his usual dubious relationship with facts, Trump’s legal filing for the suit claimed no presidential candidate in history has won both Florida and Ohio but lost the overall election (Richard Nixon did in 1960).

Despite all this chicanery and – and apparent recordings of voter coercion in Georgia emerging at the start of the new year – we do have a new President preparing to take office at the end of January. With this comes an expectation of a return to more traditional politics and international relations, with policy no longer dictated by hair-trigger firings and late-night twitter rants (Trump managed to send a record 12,000-plus tweets over 2020). That said, nuance is key and there is a school of thought that US-China frictions are unlikely to moderate that much under the new administration as the view of the Asian giant as a strategic rival is now bipartisan in the US.

Data from the Pew Research Centre suggest some waning of anti-China sentiment, with just two in two in 10 Democrats seeing the country as an enemy, versus four in 10 Republicans, but there is a suggestion Biden’s strategy could be more impactful as his administrative style may be better coordinated and structured than his predecessor’s.

Despite clear rays of light, we have to acknowledge scarring from Covid-19 is likely to remain for years to come and figures from the OECD predict the UK’s recovery from the pandemic will lag behind every other major economy apart from Argentina, with the Organisation warning against any cutting of government spending despite spiralling debt levels. Against a backdrop of heavy government expenditure to get through the pandemic, the OECD said nations need to continue to make use of record-low borrowing costs to spend on protecting businesses and households. It cited a risk that the lessons from the 2008 financial crisis would be forgotten – when government austerity choked off growth and entrenched inequality.

One thing we can expect is the end of a few market-shaping forces of recent years, with Trump leaving office, vaccines – hopefully – slowing the spread of Covid-19, and Brexit finally done, wherever that might take us. We have written in recent months about the dislocation between economic reality and market hope, and with 93% of economies around the world contracting in 2020 and global equities still ending the year at all-time highs, that link is effectively broken, at least for now.

To reiterate, a huge part of these record market levels has come from just a few ‘Covid resistant’ technology businesses and if we, at the very least, see some clarity return in 2021 (as those obfuscating forces recede), there should be more of a level playing field where fundamentals can shine through. The last two months of 2020 saw broader equity performance, including a strong bounce for many deeply bruised value names, and if this continues, there should be stronger support for markets than the increasingly narrow leadership that persisted throughout much of 2020.

Please remember that past performance is not a guide to future performance and the value of an investment and any income generated from them can fall as well as rise and is not guaranteed, therefore you may not get back the amount originally invested and potentially risk total loss of capital.

This document should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice.