Financial Markets Update – October To December 2020

How have the financial markets performed over the quarter?

The arrival of the vaccine has caused markets to jump. The UK stock market has been one of the worst affected by the pandemic and as a consequence it rebounded strongly as news of the vaccine was released. The FTSE All Share index climbed by 13% over the quarter, which is about 5% more than the World index. In bond markets, gilts were little changed, though bonds issued by corporations strengthened in price.

All in all, it was a good quarter.

Why have markets done so well?

The economic costs of battling the pandemic are enormous but these will be shouldered largely by the Government. Markets are a forward looking mechanism and the vaccine provides a defined time line for the pandemic. We can now assume that things will return to something like normal within the next few months.

Additionally, people have money to spend and once the pandemic is finally brought under control, confidence is growing that the economy will begin to recover very quickly.

This has been an important quarter for political events. What are the implications of Brexit and the US election?

It is great to finally get these political uncertainties behind us. As we expected, there were some worrying days during the Brexit negotiations but a deal finally got made. It is important to stress that from an economic stand point that this was not a great outcome, though it will be better than a no deal. There will be some short-term costs in implementing the new trading arrangements but at least it brings some clarity for businesses who will now be able to plan for the future.

The US election proved to be a bitter one. The arrival of Joe Biden to the White House should bring more stability to the world stage. Biden intends to increase spending and increase taxes on the wealthy but his approach will be conservative. Compared to Trump, he will be less concerned about keeping the stock market level at a high level. At the same time, he will bring stability and be more predictable.

Both the Brexit resolution and US election removes uncertainty and therefore reduces risks for investors.

What is the outlook for 2021?

Economic recovery periods often produce the most sustainable gains for the stock market. Profits will rebound and improving business conditions should improve confidence. Interest rates look set to remain at very low levels and investors will be willing to pay higher prices for sources of yield as a consequence. The Brexit resolution should bring us greater clarity on the UK economy, though it will take a little time for the full implications of the deal to be felt.

We are more positive on the markets for 2021. Our main concern lies with the valuations of the leading technology companies in the US which have become increasingly more expensive as the pandemic has progressed. Expectations for future profits are now very high and leave little margin for disappointment.