2020 ended at a frenetic pace as worsening news flow relating to Covid cases was tempered by the successful conclusion of Brexit negotiations, and by news that the AstraZeneca/Oxford University vaccine had been approved for use by MHRA, the UK’s medical regulator.
Symptomatic of an unusual year, a normally quiet day on Christmas Eve was dominated by the UK and the EU sealing a trade agreement ahead of the Brexit grace period ending on 31st December 2020. Disagreements over fishing rights and the ‘level playing field’ were resolved with sensible compromises made on both sides, meaning neither side will impose tariffs on goods being traded.
Boris Johnson and his government must now endeavour to show what it intends to do with the powers it has brought back. Indeed, new talks will almost immediately start on financial services’ relationship with the EU, as treasury ministers and civil servants look to draft a ‘memorandum of understanding’ that will lay the groundwork for market access and future deals.
In the run up to the agreement, UK equities and the Pound had rallied strongly, with small gains for both seen since the announcement on Christmas Eve perhaps exacerbated by traditionally lower levels of trading around the Christmas period. UK assets are undervalued and unloved by global asset allocators; a fact illustrated well by the chart below showing the performance of the Pound versus a basket of currencies. The conclusion of Brexit negotiations is a major step forward in reversing this negative sentiment, but in the near term, attention will now rightly turn back to the roll-out of vaccines, as the path of Covid is still the overwhelming determinant of asset prices.
Looking back over the last two weeks in markets, global equity indices broadly rose in value in local currency terms, but when accounting for the Pound’s strength in the run up to and aftermath of the Brexit deal, many ended the period in the red. The Pound rose by 1.1 – 2.1% against other major currencies, meaning US, European and Japanese equities all fell in Pound terms by between 0.1 – 0.8%, while the large-cap FTSE 100 index also fell by 1.1%. The mid-cap FTSE 250 index was the main beneficiary of the stronger Pound, continuing its recovery with a 1.9% gain, while Asian and Emerging Market indices also rose by between 0.6 – 1.3%.
We see the medium-term outlook for risk assets as positive; particularly those hardest hit in 2020 by Covid-related factors. The success of vaccines is what we must focus on now – both in terms of retaining this optimism, but also when seeking to manage risk. Vaccine roll-outs have been successful so far at least in the UK, but questions remain over their speed in the coming weeks and months in relation to meeting ambitious targets, while in thinking of tail risks, we must consider outcomes that might arise should issues arise with efficacy. This said, we start 2021 with a positive mindset and hope that these expectations can be met.
Market views by Ollie Stone – Head of Portfolio Management and Fairstone Private Wealth Ltd (4th January 2021)