A selection of articles looking back through the markets last month.
Global Market Review
Shares advance on vaccine optimism
After a tumultuous year in which the coronavirus pandemic gripped the world, many major stock markets ended 2020 in positive territory. Investor sentiment was buoyed towards the end of the year by optimism over the prospect of widespread vaccination programmes that are expected to underpin economic recovery, alongside anticipation of further support from leading central banks. By the end of the year, the World Health Organisation (WHO) reported that over 80 million cases had been diagnosed worldwide with 1.8 million deaths confirmed.
“Positivity was tempered by concerns over the outlook for the UK’s important financial sector”
Confidence also received a boost from an eleventh-hour Brexit trade deal, secured only days before the transition period was due to expire. Nevertheless, Brexit-related positivity was tempered by concerns over the outlook for the UK’s important financial sector, which was not covered by the deal. As a result, UK financial services companies will no longer have the financial “passporting” rights that allow them to trade freely within the single market without additional regulatory authorisation, and this problem has yet to be resolved.
The UK bucked the trend amongst leading equity markets over 2020: although the FTSE 100 Index rose by 3.1% during December, it ended the year 14.3% lower, blighted by warnings of a new and more infectious variant of the Covid-19 virus. Rising infection rates and worries over the impact on hospital capacity triggered the imposition of fresh restrictions on a large proportion of the UK population and a widespread travel ban from other countries. The move created fresh concerns over prospects for economic recovery, and the Government announced another extension to its furlough scheme, which is now scheduled to finish at the end of April 2021.
After considerable delays, President Donald Trump signed into law a coronavirus relief package worth US$900 billion, narrowly avoiding a partial shutdown of the federal government. President Trump is set to leave office when President-elect Joe Biden is inaugurated on 20 January, although President Trump has continued to insist that the Presidential election was fraudulent. The Dow Jones Industrial Average Index rose by 3.3% over December and climbed by 7.2% over the year.
In the eurozone, the European Central Bank (ECB) expanded its programme of stimulus measures and raised lending to banks that continue to extend loans to businesses and households. During December, Germany’s Dax Index rose by 3.3%, posting an increase of 3.5% over 2020.
Asia & Japan Market Review
Japanese exports disappoint
Weak trade data dealt a blow to Japanese investors during December. Exports had grown at an annualised rate of only 0.2% in October, raising hopes that they would achieve some long-awaited growth in November; however, shipments extended their decline during the month, according to the Ministry of Finance (MoF), falling by 4.2% year on year, and dragged down by slower growth in exports to China and a drop in shipments to the US. Elsewhere, imports fell by 11.1% year on year.
“Japan’s government unveiled a fresh raft of stimulus measures”
According to the Bank of Japan’s (BoJ’s) quarterly Tankan survey, business sentiment amongst large Japanese manufacturers picked up during the final three months of 2020, although overall sentiment remained in negative territory. Japan’s economy expanded by 5.3% between June and September 2020, following a record contraction of 8.3% during the previous quarter. The outlook remains clouded, nevertheless, by uncertainties over the ongoing Covid-19 pandemic as countries around the world struggle with fresh waves of infection. During December, Japan’s government unveiled a fresh raft of stimulus measures designed to shore up the economy against the ravages of coronavirus.
The Nikkei 225 Index climbed by 3.8% over December and rose by 16% over 2020. Meanwhile, the Topix Index rose by 2.8% during December and by 4.8% over the year. In comparison, the TSE Second Section Index – which represents medium-sized Japanese companies and is therefore more exposed to the domestic economy – climbed by 1.1% over the month but fell by 9.6% over the year.
Having contracted at a record rate of 7% during the second quarter of 2020, Australia’s economy grew by 3.3% over the third quarter, fuelled by a strong rebound in household consumption, which increased by 7.9%. However, over the first three quarters of 2020, the economy contracted by 3.8% and, looking ahead, the Reserve Bank of Australia (RBA) expects the recovery will be “uneven and bumpy and … drawn out”. The country’s economy will not reach the level of output achieved at the end of 2019 until the end of 2021. Australia’s economy is predicted to expand by 5% in 2021 and 4% in 2022, although RBA Governor Philip Lowe warned that unemployment and underemployment remain a problem, and wage growth is likely to be lacklustre. The ASX All Ordinaries Index rose by 1.6% during December, and by 0.7% over 2020.
Emerging Markets Review
Brazil exits recession
Brazil emerged from recession during the third quarter of 2020: the country’s economy grew by 7.7%, posting its strongest growth since 1996, having contracted by 9.6% in the second quarter and by 1.5% in the first quarter. Activity rebounded across the economy as lockdown measures were lifted, with especially large jumps in industry and services. Household consumption rose by 7.6%. Although emergency government aid programmes expired at the end of 2020, Minister of Economy Paulo Guedes believes that the recovery can be sustained, underpinned by investment growth; he also insisted that reform measures would continue.
“China is set to supersede the US as the world’s largest economy by 2028”
According to the quarterly inflation report produced by Brazil’s central bank, an effective vaccination programme would help to stabilise confidence and increase demand, particularly in sectors that have been affected by social distancing measures. Uncertainty over the outlook has been exacerbated by ongoing scepticism over the Covid-19 pandemic in Brazil, and by problems over the vaccine rollout. The Bovespa Index climbed by 9.6% in December and rose by 2.9% during 2020.
Despite a dismal performance from India’s economy during 2020, the CNX Nifty Index rose by 7.8% during December and by 14.9% over the year. In comparison, India’s economy shrank by 23.9% between April and June, and by 7.5% between July and September. Retail price inflation fell from 7.6% in October to 6.9% in November; nevertheless, it remained above the central bank’s 6% target. Meanwhile, wholesale price inflation continued to rise, climbing from 1.48% to 1.55%.
The World Bank expects China’s economy to expand by 7.9% in 2021, boosted by strengthening consumer spending and an uptick in business confidence. Looking ahead, the World Bank believes that Covid-19 remains the primary risk to China’s economic growth. It urged the country’s leaders to withdraw fiscal support gradually, warning: “A premature policy exit and excessive tightening could derail the recovery”. Elsewhere, China’s export activity gathered pace during November, despite an increase in the value of the yuan. Exports rose at an annualised rate of 21.1%, while imports rose by 4.5%.
China is set to supersede the US as the world’s largest economy by 2028, according to the Centre for Economics and Business Research (CEBR) – five years earlier than previously predicted. Over December, the Shanghai Composite Index rose by 2.4%; over 2020 as a whole, it increased by 13.9%.
Europe Market Review
Europe welcomes post-Brexit trade deal
European equity markets generally welcomed the news that the UK and EU had finally managed to thrash out a post-Brexit trade deal with only a week left before the end of the transition period. President of the European Commission Ursula von der Leyen commented: “This was a long and winding road … now is the time to turn the page and look to the future”.
“Now is the time to turn the page and look to the future” (EC President Ursula von der Leyen)
Nevertheless, investor sentiment remained hostage to developments in the battle against the spread of Covid-19, and many European countries – including France, Germany, Italy, and the Netherlands – tightened restrictions in response to rising infection rates. During December, the Pfizer/BioNTech vaccine was approved for use across the EU by the European Medicines Agency (EMA). By the end of the year, the World Health Organisation (WHO) had reported over 26 million cases in Europe, with over half a million deaths confirmed. The Dax Index rose by 3.3% in December and posted an increase of 3.5% over 2020. Meanwhile, the CAC 40 Index rose by 0.6% in December and fell by 7.1% during 2020, and Italy’s FTSE MIB Index climbed by 0.8% over the month but declined by 5.4% over the year.
The European Central Bank (ECB) expanded its programme of stimulus measures and increased lending to banks that continue to extend loans to businesses and households. Policymakers believe that uncertainty is likely to remain high; nevertheless, the roll-out of vaccinations is expected to achieve a gradual resolution of the current health crisis, although further outbreaks cannot be ruled out.
The Bundesbank upgraded its forecasts for Germany’s economic expansion and now expects a “sharp rebound in GDP after the final quarter of 2020 and the first quarter of 2021”, boosted by easing restrictions underpinned by vaccine rollouts and improving consumption opportunities. The central bank expects the German economy to contract by 5.5% this year, compared with an earlier projection of -7.1%; for 2021, it adjusted its growth predictions from 3.2% to 3%; in 2022, growth is forecast to accelerate to 4.5%, compared to an earlier forecast of 3.8%. Inflation is expected to pick up in 2021, driven by the reversal of a temporary cut in value added tax (VAT) rates, but is then set to ease: by 2023, Germany’s inflation rate is tipped to reach just over 1.5%, which is below the ECB’s target of almost 2%.
Global Bond Market Review
A challenging outlook for sovereigns
2021 is expected to be a challenging year for lower-rated sovereigns. There were six sovereign defaults during 2020 – Argentina, Belize, Lebanon, Ecuador, Suriname, and Zambia – and S&P Global Ratings predicts further defaults amongst low- and middle-income sovereigns as Covid-19 forces countries’ leaders to concentrate on programmes to support their populations’ social needs at a time when they are ill equipped to continue servicing their debt. Many lowly rated sovereigns suffer from high debt and high interest burdens, weak public finances, and often have “narrow” economic bases that are concentrated on one key industry, often commodities.
“The IA Global Bonds sector will be split into 14 new sectors”
The news that the UK and EU had finally reached a post-Brexit trade deal – with days to spare before the end of the transition period – provided a boost for sentiment. Concerns over the possibility of no deal sent the yield on the ten-year German government bond as low as -0.63% during December, but overall, it ended the month higher, edging up from -0.59% to -0.56%.
Investors welcomed the news that President Donald Trump had finally signed into law a US$900 billion coronavirus relief package, despite disagreeing with the terms. The ten-year US Treasury bond yield rose from 0.84% to 0.93% during December, rising as high as 0.97% early in the month. In comparison, it began 2020 at 1.92% before the spread of the coronavirus pandemic, more than halving over the year.
The onset of the coronavirus pandemic proved tough for bond funds, according to the Investment Association (IA), which reported that fixed income funds experienced outflows of £7.5 billion in March as investors opted to take cash from bonds rather than crystallising losses caused by plummeting share prices. Nevertheless, interest in bonds subsequently recovered, and bonds enjoyed the largest inflows of any asset class over the year to October, with global bond funds particularly in demand.
The IA also announced that the IA Global Bonds sector will be split into 14 new sectors in order to ensure they remain relevant. The division will take place in April 2021 and will result in the following new sectors: USD Government Bond; EUR Government Bond; Global Government Bond; Global Inflation Linked Bond; USD Corporate Bond; EUR Corporate Bond; Global Corporate Bond; USD Mixed Bond; EUR Mixed Bond; Global Mixed Bond; USD High Yield Bond; EUR High Yield Bond; Global High Yield Bond; Specialist Bond.
UK Bond Market Review
Investors welcome post-Brexit trade deal
The yield on the benchmark UK gilt fell from 0.31% to 0.20% over December as a whole as investors reacted to the news of tightening coronavirus-related restrictions in response to rising infection rates and a new, more infectious variant of the virus. Gilts were choppy during the month, and sentiment – driven by worries over Covid-19, optimism over the vaccine rollout, and uncertainty over Brexit – pushed the yield on the ten-year government bond as high as 0.37% and as low as 0.17%.
“According to the ONS, the economy remains 7.9% below its pre-pandemic peak”
Investors generally welcomed an eleventh-hour post-Brexit trade deal, and the pound reached its highest level against the US dollar since spring 2018. Nevertheless, concerns over unresolved issues, including UK services, and financial services in particular, dampened any great celebration. The British Chambers of Commerce (BCC) urged the Government to provide clear guidance for companies, complaining: “Far too many details and procedures have been left, literally, to the last minute”.
Although the UK economy expanded for a sixth consecutive month during October, its rate of expansion continued to slow, falling from 1.1% in September to only 0.4% during October as some Covid-19 restrictions were reimposed. According to the Office for National Statistics (ONS), the economy remains 7.9% below its pre-pandemic peak. The rate of inflation dropped from 0.7% in October to 0.3% in November, driven down by lower prices for clothing, food, and non-alcoholic drinks.
The Bank of England (BoE) maintained its key interest rate at 0.1%, but policymakers remain “ready to take whatever additional action is necessary” to achieve its 2% inflation target. The Monetary Policy Committee (MPC) maintained its programme of asset purchases at £895 billion. BoE officials expect the UK economy to contract by more than 1% during the final quarter of 2020.
The rate of unemployment rose to 4.9% during the three months to October; this was 0.7 percentage points higher than the previous quarter, and 1.2 percentage points higher than the same period in 2019. The number of people out of work climbed to 1.69 million, and redundancies reached a record high of 370,000 during the period. The ONS reported that the number of payroll employees in the UK had fallen by 819,000 people since February, with job losses particularly concentrated in the retail and hospitality sectors, which have been hit especially hard by lockdown measures.
UK Equity Market Review
Worst year for the FTSE 100 since 2008
With a matter of days left before the end of the transition period, the UK and EU finally reached a post-Brexit trade deal. UK companies will be able to continue to sell goods in the EU market without tariffs or quotas, although changes to paperwork and regulations could cause some disruption as businesses adapt to the new regime. However, the share prices of UK banks faltered on the news that no deal had been reached on financial services and, as a result, banks have lost the “passporting” rights that enabled them to trade across Europe.
“Optimism was dampened by the rapid spread of a new variant of the Covid-19 virus”
The Confederation of British Industry (CBI) welcomed the agreement, but warned: “Coming so late in the day it is vital that both sides take instant steps to keep trade moving and services flowing while firms adjust”. The deal provided a boost for UK share prices, but optimism was dampened by the rapid spread of a new variant of the Covid-19 virus. Following the imposition of tighter “Tier Three” restrictions on a large proportion of England, a large swathe of the population was subsequently placed under even more severe “Tier Four” restrictions. The Government extended its furlough scheme to the end of April 2021 in a bid to ease worries over the economic impact of those measures. By the end of 2020, almost 2.5 million cases of Covid-19 had been confirmed in the UK.
Vaccination-related optimism lifted UK consumer confidence during November, according to GfK’s Consumer Confidence Index. Although the index remained mired in negative territory, it has recovered from a low of -34 in May – and subsequent dips in September and October – to reach November’s level of -26.
UK equity funds experienced a year of two halves in 2020, according to the Investment Association (IA): during the first five months, retail investors made the most of falling share prices, putting £2.3 billion into funds invested in UK companies. It was a different story in subsequent months, however, as investors withdrew £3.8 billion from UK equity funds.
During December, the FTSE 100 Index rose by 3.1%, but the benchmark index ended 2020 14.3% lower and experienced its worst calendar year performance since 2008, when it fell by 31.3%. Meanwhile, the FTSE 250 Index climbed by 6% over the month, but declined by 6.4% over the year.
UK Equity Income Market Review
Dividends set to pick up in Q2 2021
Global dividends are calculated to have fallen during 2020 at a headline rate of 15.7% in a best-case scenario and by 18.5% in a worst-case scenario, according to Janus Henderson’s Global Dividend Index. There is a clear divergence in different areas of the world: the UK, Europe, and Australia were particularly hard-hit; emerging markets and North America proved relatively resilient; Japan lay somewhere in the middle. Looking ahead, the first quarter of 2021 is still likely to be affected by dividend cuts, but payments are expected to pick up from the second quarter. On a worst-case scenario, global dividends are predicted to be flat during 2021, whereas a best-case forecast suggests a 12% rebound.
“The PRA announced that banks will be permitted to restart dividend payments”
Yields fell over December and over 2020 as a whole. The yield on the FTSE 100 Index declined from 3.88% to 3.70% during the month, having started the year at 4.36%. The FTSE 250 Index’s yield fell from 2.86% to 2.32% over December, having begun 2020 at 2.95%. In comparison, the yield on the benchmark UK gilt dropped from 0.31% to 0.20% during December, compared with 0.76% twelve months earlier.
In its latest Financial Stability Report, the Bank of England (BoE) confirmed that UK banks have high levels of capital that would allow them to “absorb very big losses while continuing to lend”. The Prudential Regulation Authority (PRA) announced that banks will be permitted to restart dividend payments, which were stopped in March as a precautionary measure as the coronavirus pandemic took hold. Nevertheless, the PRA warned that “any distributions should be prudent, reflecting the still elevated levels of economic uncertainty and the need for banks to continue to support households and businesses”. The PRA also urged banks to “exercise a high degree of caution and prudence” towards cash bonuses.
The FTSE 100 Index rose by 3.1% during December but fell by 14.3% over 2020. Meanwhile, the FTSE 250 Index climbed by 6% over the month, but dropped by 6.4% over the year.
Net retail sales of funds hit a record level of £8.3 billion during November, half of which went into equity funds, according to the Investment Association (IA). However, the UK remained out of favour: while demand for funds invested in global, Asian, and North American equities was particularly strong, UK funds experienced net retail outflows of £461 million.
US Market Review
US equities end 2020 strongly
Share prices rose strongly in the US during December, boosted by the news that President Donald Trump had – despite raising many objections – signed into law a coronavirus relief package worth US$900 billion. His last-minute decision narrowly averted a partial government shutdown.
“The S&P 500 Index registered 33 new closing highs during 2020”
Sentiment was also buoyed by the US government’s approval of the Pfizer/BioNTech vaccine, which was followed by approval for Moderna’s vaccine. Nevertheless, December was blighted by surging infection rates in the US; according to the World Health Organisation (WHO), over 19 million cases had been diagnosed in the US by the end of the year, with more than 335,000 deaths recorded.
During December, the Dow Jones Industrial Average Index rose by 3.3%, climbing by 7.2% over 2020. The Nasdaq Index posted a monthly increase of 5.7% and surged by 43.6% over the year. Meanwhile, the S&P 500 Index rose by 3.7% during December and by 16.3% over 2020.
2020 proved to be an eventful year for American markets: according to S&P Dow Jones Indices, the S&P 500 Index registered 33 new closing highs during 2020, and also experienced a bear market – in which the index fell by 33.93% between 19 February and 23 March – and a bull market, in which it rose by 67.88% from its 23 March low. However, an “uneven” market, exacerbated by shutdowns in various sectors, increased top-heaviness in the S&P 500 Index: 27.4% of its value was in the top ten stocks by the end of 2020, and three stocks – Apple, Amazon, and Microsoft – accounted for more than 53% of its total return over the year.
The Federal Reserve (Fed) upgraded its forecast for US economic growth next year from around 4% to 4.2%. Nevertheless, Fed Chair Jerome Powell warned that the next few months are likely to be especially challenging, although he believes that the economy is set to perform strongly during the second half of 2021 once a significant proportion of the population has been vaccinated. Most members of the Federal Open Market Committee (FOMC) expect US interest rates to remain near zero through to 2023. The Fed also announced that US banks would be allowed to resume share buybacks in addition to dividends, subject to certain restrictions. JPMorgan Chase subsequently revealed a US$30 billion buyback programme, to start in the first quarter of 2021.