2020 ended with an inoculated bang. Despite renewed lockdowns in Europe and rising COVID-19 infections globally, risk assets continued their march upwards. This was amid hopes for reflation, better growth and higher earnings, supported by a backdrop of more fiscal stimulus in the US, a Brexit deal and the beginnings of vaccine rollouts.
The long-awaited Brexit deal will be seen by many as a new era for the UK, whether this be positive or negative. For nearly all of us though, it will be a welcome relief from the almost constant to-ing and fro-ing that has plagued the UK since the summer of 2016. Greater clarity on the trading relationship we hold with our biggest economic partner contributed to the FTSE, ending the year at its highest point since the March 2020 falls.
Despite the strong end to the year, the UK equity market recorded its overall worst year since the 2008 financial crisis. The UK has lagged behind its international peers due to the equity markets heavy weighting in industries that have struggled in the pandemic, notably oil stocks. Moving forward, the effect that renewed lockdowns have on economic activity could scupper the recovery the UK that was seen over the summer.
The events seen last week in the U.S brought a striking reminder that democracy should never be taken for granted. (Read here: Citizens of the United States stormed the capitol building and 4 people have died). What would have seemed an almost unthinkable course of action even a year ago has now been witnessed in Washington and has not been condemned by the sitting President. Regardless of this, equity markets continued their march forward.
The now confirmed Biden sweep in the U.S brings with it the prospect of a big stimulus package being delivered in 2021, against a backdrop of tax rises. However, don’t be fooled. Rising taxes does not mean a dampening in equity return prospects, as historically there has been no relationship between the two. It is company earnings that is the key driver of returns and is what we are watching closely in 2021.
European bourses ended the year on a positive note. The rally looked to be driven by a combination of better-than-expected economic and survey data and continued optimism on the vaccine front. Also, the long-awaited Brexit deal has benefited the European sentiment, coupled with the major investment treaty signed with China at the tail end of 2020. In 2021, we are heavily focused on the ongoing effects of the pandemic on Europe coupled with post-Brexit trading activity.
As has been widely reported in the Western media, the ability of Asia to recover so quickly from COVID-19 has been a remarkable turnaround to what the region was facing in March. The rollout of vaccines across the region coupled with a $1.4 trillion relief package from the U.S saw Asian markets continue to perform strongly. A key aspect that we are keeping our eye on in 2021 is the stance that Joe Biden takes with Beijing – although the unpredictability of Trump has been removed, do not underestimate the ill feeling that is felt towards China in the U.S and to some extent, the rest of Western Europe.
Another strong end to 2020 greeted emerging markets, looking past the emergence of a mutant strain of the coronavirus in the UK. A slide in U.S dollar and continued vaccine optimism fuelled performance in the region. Higher commodity prices boosted sentiment towards Latin American equity markets, particularly in Colombia and Brazil, which saw the region outperform Asia and EMEA (Europe, Middle East and Africa). However, the commodity-sensitive region was the worst impacted among emerging markets over the course of the year by the ravages of the COVID-19 pandemic. As a region, Asia’s emerging middle class represents a unique opportunity moving forward for investment both in 2021 and beyond.
The increase seen in almost all equity areas saw some fixed interest holdings struggle at the tail end of 2020, despite growing concerns surrounding the virus and its ongoing effects on global economies. Fixed interest is still an important hedge in portfolios against market turbulence and will continue to be monitored moving forward to make sure that this protection is not being sacrificed by fund managers in the search for returns.
We will continue to monitor the above themes in markets throughout 2021. If you have any questions about your investments, then please contact us on 01258 857101, or email us at firstname.lastname@example.org.
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Written by Greenfields Financial Management Ltd.
This article is for information only and should not be treated as individual advice. No action should be taken in respect of this article without independent financial advice. This information represents the opinion of Greenfields Financial Management Ltd. only.
 For data on this point, please see the following research from pew https://www.pewresearch.org/global/2020/10/06/unfavorable-views-of-china-reach-historic-highs-in-many-countries/