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The tumultuous final quarter of 2020

08 January 2021

Jonathan Marriott, Chief Investment Officer

In keeping with previous quarters, the pandemic has continued to dominate our thoughts. A continued rise in cases and the discovery of a new, more infectious, strain of the virus has led to greater restrictions on activity across the board. After much debate, to counter the decline in activity, we have seen stimulus packages agreed in Europe and the US. In the UK, the furlough scheme has been extended to March 2021. Positive news regarding vaccines raised the prospect that the virus could eventually be defeated. As a result, despite the bad news on actual infection rates, stock markets had a positive quarter. Some of the worst affected stocks led the markets higher. Investors rotated into underperforming stocks out of the tech sector, which has outperformed in the first three quarters.

Away from the pandemic, we had a highly contentious US election. Despite much protest from the Trump campaign, with accusations continuing until year-end, Joe Biden was eventually declared the winner.  However, the Democrats lost seats in the House of Representatives. The Senate result was decided this week, with two run-off elections in Georgia giving the Democrats control of the Senate by the narrowest of margins. Being reliant on the Vice-Presidential vote and unanimous agreement of Democratic and independent Senators may still make passing the Democrats' more radical tax plans difficult. A further stimulus package and more infrastructure spending seem likely. Joe Biden will still have to contend with contentious international issues, particularly with China and Iran. He is more likely to look to work with international partners in Europe and elsewhere to take a multilateral approach to these issues. He also takes climate change seriously and action on this will be a priority.

The Brexit deal only came on Christmas Eve after the markets closed for the holiday, but it had looked likely in the days ahead. The deal will allow the free flow of trade but not without increased paperwork.  The last sticking point in negotiations appeared to be about fishing rights, which represent a small part of the UK economy. Financial Services, which are much more important to the economy and a significant source of tax revenues, were not included in the deal. UK Financial Services will now depend on being granted "equivalence" to access the European market. A lot of work remains but, for now, the pandemic is having a much larger impact on the economy and financial markets.

The short-term outlook for markets will continue to be dominated by the pandemic and the speed of the roll out of the vaccines. Some companies have been damaged beyond repair, others will be left impaired by an increased debt burden after the pandemic, but some companies have come through this in good shape. Many companies that have been hit hard have seen share price rises in the fourth quarter of 2020 but we are reluctant to chase these investments. We continue to favour companies with strong balance sheets and good long-term growth prospects. With many companies and individuals having increased debt levels, it will be hard for central banks to raise rates. We therefore expect a long period of very low interest rates that will support the share price of companies with solid earnings.

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