Looking back at the markets through January 2021

stock market view

A selection of articles looking back through the markets last month.

globe Global Market Review

“Unintended consequences”

Financial markets are becoming increasingly vulnerable to a sharp correction that would, in turn, jeopardise stability, according to the International Monetary Fund (IMF). The IMF warned that investors’ expectations of continued support from governments and central banks has generated “a sense of complacency”. This has created a dilemma for policymakers who need to balance the current requirement for accommodative financial conditions with the need to protect the financial system against any “unintended consequences of their policies”.

“The UK economy is likely to ‘get worse before it gets better’”

The UK entered a new lockdown phase early in January in a move designed to curb the intensifying spread of the virus. Schools and non-essential businesses were closed, and social interaction curtailed. Investor sentiment received a further knock from the news that travellers arriving in the UK will have to quarantine for ten days in Government-provided accommodation. Chancellor of the Exchequer Rishi Sunak warned that the UK economy is likely to “get worse before it gets better”. During January, the FTSE 100 Index fell by 0.8%.

The pandemic’s resurgence and consequent lockdown measures are likely to put a brake on the eurozone’s economic recovery, according to President of the European Central Bank (ECB) Christine Lagarde. Nevertheless, economic growth is expected to rally once the impact of the pandemic subsides and inflation is predicted to pick up, supported by “accommodative” fiscal and monetary policies. The Dax Index declined by 2.1% over the month.

In the US, politics took centre stage during January as Joe Biden was inaugurated as the country’s 46th President. Following riots at the US Capitol, the House of Representatives voted to impeach his predecessor President Donald Trump for inciting violence. During the month, President Biden unveiled his proposed “America Rescue Plan”, a package worth US$1.9 trillion that includes enhanced unemployment benefits and individual stimulus payments. He also appointed former Federal Reserve (Fed) Chair Janet Yellen as the US’s first-ever female Treasury Secretary. The Dow Jones Industrial Average Index fell by 2% during January.

Japan was placed in a state of emergency early in January as the country’s leaders sought to control the renewed spread of coronavirus. Despite this, the Nikkei 225 Index reached a three-decade high during the month, boosted by hopes of substantial financial stimulus in the US. Over January as a whole, the benchmark index rose by 0.8%.


globe-asia  Asia & Japan Market Review

Hopes of US stimulus boost sentiment

Despite a surge in Covid-19 infections that led to a state of emergency being declared in the four prefectures of Tokyo, Chiba, Saitama, and Kanagawa, Japan’s benchmark Nikkei 225 Index reached a three-decade high during January. Japanese financial stocks were boosted by hopes of substantial financial stimulus measures in the US following confirmation that the Democrats had taken control of the Senate after runoff elections in the state of Georgia.

“The IMF expects Japan’s economic activity to return to pre-pandemic levels later this year”

Over January as a whole, the Nikkei 225 Index  rose by 0.8%, while the Topix Index increased by 0.2% and the TSE Second Section Index climbed by 6.8%. Sentiment was dampened slightly by speculation that Tokyo’s Olympic Games – already rescheduled from last year – might not be able to go ahead if the authorities fail to gain control over coronavirus infection rates. The Bank of Japan (BoJ) warned that the risk of “downward pressure stemming from … the resurgence of Covid-19 is likely to remain strong for the time being, particularly in face-to-face consumption”. The International Monetary Fund (IMF) upgraded its forecast for economic growth in Japan during 2021 from 2.3% to 3.1% and expects the country’s economic activity to return to pre-pandemic levels later this year.

Core CPI continued its decline in December, falling at an annualised rate of 0.4%, and consumer sentiment weakened in January. The average unemployment rate rose to 2.8% over 2020, and the ratio of available jobs to applicant fell from 1.60 in 2019 to 1.18 in 2020. Factory output declined by 1.6% during December as a drop in the production of machinery and cars offset an increase in the manufacture of inorganic and organic chemicals. Japan’s manufacturers expect output to improve by 8.9% during January, but to weaken by 0.3% over February.

Having risen by 1.6% in the third quarter of 2020, Australia’s rate of consumer price inflation (CPI) eased to 0.9% during the final quarter, although prices for food and non-alcoholic beverages climbed by 2.3%. Over 2020 as a whole, CPI rose by 0.9%, compared with 1.8% in 2019. Inflation weakened sharply earlier in 2020 as the country’s government scrapped childcare fees between April and July to help alleviate the economic impact of lockdown measures on families; subsequently, however, inflation rebounded strongly in the final quarter of 2020 as the subsidy was unwound. The ASX All Ordinaries Index rose by 0.3% during January.


globe-africa Emerging  Markets Review

China posts best quarterly growth for two years

China’s economy achieved its most rapid quarterly expansion for two years during the final three months of 2020, posting growth of 6.5% during the period. Over 2020, the country’s economy expanded by 2.3%. The International Monetary Fund (IMF) expects China’s economy to grow by 8.1% this year and by 5.6% next year, considerably ahead of its forecast for global economic growth of 5.5% in 2021 and 4.2% in 2022. According to S&P Global Platts, China’s economic recovery is likely to boost global demand for oil.

‘”Build an open world economy … take down barriers”’ (Xi Jinping)

In a speech to the World Economic Forum (WEF), President Xi Jinping urged world leaders to “build an open world economy … discard discriminatory and exclusionary standards … and take down barriers to trade, investment and technological exchanges”.

Despite a strengthening yuan, China posted robust export growth during December. Exports rose by 18.1% year on year during the month; meanwhile, imports picked up, rising at an annualised rate of 6.5%. Over 2020 as a whole, exports increased by 3.6% while imports declined by 1.1%. Industrial output grew at an annualised rate of 7.3% during December compared with 7% in November. However, retail sales showed signs of a slowdown: having grown by 5% in November, they rose by only 4.6% year on year in December. The Shanghai Composite Index rose by 0.3% over January.

India’s economy is continuing to recover, according to the country’s central bank, which expects economic growth to turn positive in the third quarter of the fiscal year. The Reserve Bank of India (RBI) highlighted signs of economic recovery in December, including a rise in manufacturing activity, and an increase in demand for bank credit. The RBI observed: “Recent shifts in the macroeconomic landscape have brightened the outlook, with GDP in striking distance of attaining positive territory and inflation easing closer to the target”. The central bank also hailed India’s success in avoiding a second wave of Covid-19 infections, commenting: “Since mid-September, India has “bent it like Beckham”. Elsewhere, the IMF upgraded its forecast for India’s economic growth this year from 8.8% to 11.5%, citing a stronger-than-expected post-lockdown rebound.

In contrast, credit ratings agency Fitch warned that, although India is in a recovery phase, supported by vaccine rollouts, the country’s economy is set to suffer “lasting damage” from the pandemic. The CNX Nifty Index fell by 2.5% during January.


globe-europe Europe Market Review

Outlook for Europe remains subdued

Europe was blighted by a fresh wave of lockdown measures during January in response to rising Covid-19 infection rates. Economic activity in the eurozone is unlikely to recover to pre-pandemic levels until at least 2022, according to the International Monetary Fund (IMF), which downgraded its forecast for economic growth in the euro area in 2021 from 5.2% to 4.2% for 2021. In comparison, the European Central Bank (ECB) forecast the eurozone’s economy to expand by 3.9% in 2021, following a contraction of 7.3% in 2020. During January, the Dax Index fell by 2.1%, while the CAC 40 Index declined by 2.7%.

“Business sentiment in Germany weakened during January”

The ECB expects the recent wave of coronavirus infections and the subsequent lockdowns across the region to hamper economic recovery in the short term. Sentiment was also affected during the month by controversy over the eurozone’s vaccination programme. The European Medicines Agency (EMA) approved the Oxford/AstraZeneca vaccine for use across the eurozone at the end of January. Looking ahead, ECB President Christine Lagarde predicted a resurgence in activity once the impact of the pandemic starts to recede, leading to a stronger inflationary backdrop underpinned by “accommodative” fiscal and monetary policies. The annualised rate of inflation in the euro area remained stable at -0.3% during December, according to Eurostat.

France’s economy contracted by 8.3% over 2020 as a whole; in contrast, Germany’s economy performed somewhat better than previously expected, shrinking at an annualised rate of 5%. Germany’s performance in 2020 proved stronger than in 2009, during the global financial crisis, when it contracted by 5.7%. Over 2020, private consumption fell by 6% and exports dropped by 9.9%, while imports posted an 8.6% decline.

Following a short-lived recovery in December, business sentiment in Germany weakened during January, according to the Ifo Institute, as the “second wave” of Covid-19 infections brought the country’s recovery to a halt. Optimism on trade “nosedived”; expectations amongst manufacturing firms proved “notably less optimistic”, and Ifo’s manufacturing index posted its first monthly decline following eight consecutive increases. On a brighter note, however, the Ifo Institute reported a marked improvement in sentiment amongst German exporters later in the month, and attributed this “cautious optimism” to “clarity on Brexit and the US presidency, a robust industrial economy, and the start of vaccination campaigns worldwide”.


dollar-signGlobal Bond Market Review

Bond yields lifted by hopes of US stimulus spending

Global bond yields rose during January as the news that the Democratic party had gained control of the US Senate stoked hopes of higher stimulus spending and a consequent boost to inflation.  The yield on the US ten-year Treasury bond climbed above 1% for the first time since March 2020, and the US yield curve reached its steepest level since 2017. Over January as a whole, the ten-year US Treasury bond yield rose from 0.93% to 1.11%.

“The US yield curve reached its steepest level since 2017”

S&P Global Ratings expects President Biden to focus on gaining control of the coronavirus pandemic and strengthening the economic recovery; the new President has already proposed additional stimulus measures worth US$1.9 trillion which, if passed, are expected to provide welcome support for consumer spending.

The World Bank expects global economic growth of 4% in 2021 if Covid-19 vaccination programmes are successfully rolled out, although the global economy is still predicted to be 5% smaller than pre-pandemic projections. If vaccine rollouts prove slower than expected, the global economy is forecast to expand by only 1.6% this year. In the World Bank’s worst-case scenario, significant financial stress could trigger widespread corporate and sovereign defaults.

According to credit ratings agency Fitch, the Covid-19 pandemic has exacerbated structural shifts in several sectors – including discretionary retail, airlines, hospitality, leisure, oil & gas, and parts of commercial real estate – that are likely to intensify long-term downside credit pressures. These sectors will be forced to adapt to structural changes such as the rising shift to online and greater emphasis on ESG-related considerations, and the challenges facing these sectors are likely to cascade through other parts of the credit universe.

Borrowing conditions are very favourable, according to S&P Global Ratings: corporate yields have fallen to historic lows and maturities have lengthened. However, excess liquidity could create problems as rising debt could result in “more defaults and lower recovery rates, and ultimately a drawn-out default cycle”.

Equities remained the best-selling asset class in December; nevertheless, demand for fixed income funds also rose, according to the Investment Association (IA), which reported net retail inflows of £1.33 billion into bond funds during the month. Although investors’ appetite for global bond funds dropped sharply, December saw a sharp rebound in demand for funds in the £ Corporate Bond, £ Strategic Bond, and £ High Yield sectors.


pound-signUK Bond Market Review

Lacklustre outlook for the UK economy

The yield on the benchmark UK gilt dipped early in January as Prime Minister Boris Johnson announced fresh lockdown measures to stem a rapid increase in Covid-19 infections. Over January as a whole, however, the benchmark gilt yield rose from 0.20% to 0.33%. Further progress was announced in the planned issuance of the UK’s first “green” government bond during the month. Chancellor of the Exchequer Rishi Sunak intends to reveal more information about the issuance at the Budget on 3 March.

“Activity in the UK is predicted to remain below pre-pandemic levels until 2022”

The rate of consumer price inflation rose from 0.3% to 0.6% year on year during December as higher prices for clothing and transport offset lower food prices. Lockdown measures in England resulted in a contraction of 2.6% in the UK economy during November, leaving it 8.5% below pre-pandemic levels. The services sector was particularly hard hit amid restrictions on consumer-facing businesses. Business activity declined sharply during January, according to IHS Markit, which warned that the UK risks a double-dip recession.

The International Monetary Fund (IMF) raised its forecast for global economic growth this year from 5.2 to 5.5%, but downgraded its UK estimate from 5.9% to 4.5%. Although economic activity in the US and Japan are expected to recover to pre-pandemic levels during the second half of 2021, activity in the UK and the eurozone is predicted to remain below pre-pandemic levels until 2022.

Government borrowing rose to £270.8 billion in December. For December itself, it reached £34.1 billion, representing the highest-ever amount for the month of December, and the third-highest borrowing figure in any month since records began in 1993. The Office for Budget Responsibility (OBR) has calculated that borrowing could reach £393.5 billion by the end of March 2021. Public sector net debt reached 99.4% of gross domestic product in December – its highest level since 1962.

Credit ratings agency Fitch affirmed the UK’s credit rating at AA- with a “negative” outlook. Fitch highlighted factors including the UK’s high income, its diversified and advanced economy, strong governance, and sterling’s reserve currency status, and also the very long average maturity of public debt, which is among the highest of all Fitch-rated sovereigns, and “mitigates refinancing and interest rate risks. On the other hand, Fitch cited high and rising public sector indebtedness and the negative impact of the coronavirus pandemic on the country’s public finances.


uk equities UK Equity Market Review

Fresh lockdown for the UK

As Covid-19 infection rates continued to spread during December and into January, new lockdown measures were imposed across the UK. Schools and non-essential business premises were closed, and social contact was restricted. The Government announced additional measures to support businesses in the retail, hospitality, and leisure sectors, including one-off grants of £9,000 per property. The UK approved a third Covid-19 vaccine, which is manufactured by US firm Moderna.

‘Rishi Sunak warned that the UK’s economy is likely to “get worse before it gets better”’

The UK equity market dipped following an announcement that passengers arriving in the UK will be obliged to quarantine for ten days in Government-provided accommodation. Shares in airline companies and hotels fell particularly heavily, fuelling fresh concerns the UK economy’s longer-term recovery from the pandemic. Chancellor of the Exchequer Rishi Sunak warned that the UK’s economy is likely to “get worse before it gets better”. The UK death toll from Covid-19 breached 100,000 during January. The FTSE 100 Index fell by 0.8% over the month, while the FTSE 250 Index – whose constituents tend to be more exposed to the domestic economy – fell by 1.3%.

The UK experienced its worst-ever year for retail sales growth during 2020 as retailer suffered the full impact of lockdown and social distancing measures. The British Retail Consortium (BRC) reported a 0.3% decline in total sales growth over the year, with a 24% annualised drop in in-store sales of non-food items. In comparison, online food sales rose by 36.2% during 2020. The BRC commented: “Christmas offered little respite, as many shops were forced to shut during the peak trading period … with shops still closed for the foreseeable future, costing stores billions in lost sales, many retailers are struggling to survive”.

Within the UK retailing sector, high-street retailer Next enjoyed better-than-expected sales over the key Christmas period as a strong annualised increase in online sales offset a decline in store-based trading. Supermarket chains Sainsbury’s and Morrisons reported strong Christmas sales, while Marks & Spencer reported robust trading over the period but highlighted the adverse impact of “on-off” lockdown measures.

The Financial Conduct Authority (FCA) reported that 4,000 UK financial services firms had “low financial resilience and (were) at heightened risk of failure” as a result of the coronavirus pandemic. Most of the companies in question are medium-sized or small firms, and about 30% of these have the potential to “cause harm” in the event of their collapse.


equity income UK Equity Income Market Review

Dividends fall to eight-year low

Eight years of growth was wiped off UK dividends during 2020, according to Link Group’s Dividend Monitor. Dividend payments fell by at a headline rate of 44% year on year as companies sought to shore up their finances in response to the coronavirus pandemic. UK firms paid out £61.9 billion in dividends over the year, representing their lowest annual total since 2011 and two-thirds of companies cancelled or cut their dividends between the second and fourth quarters.

“UK dividends fell more steeply than many other countries during 2020”

UK dividends fell more steeply than many other countries during 2020 because of their heavy exposure to companies in the financial and oil sector, which accounted for two-fifths and one-fifth respectively of total cuts. Nevertheless, the fourth quarter of 2020 proved better than expected for payments as some companies – including supermarket chain Sainsbury’s and plumbing and heating product distributor Ferguson – restored suspended payments. Link commented: “There are reasons for optimism, but the resurgent pandemic has pushed back the reopening of the economy even further, especially in the UK”.

Link’s best-case scenario for 2021 would see payouts of £66 billion, representing underlying growth of 8.1%. Its worst-case scenario suggests a 0.6% drop to £60.7 billion. Looking further ahead, Link does not expect UK dividends to return to their previous highs until 2025 at the earliest.

Having cancelled dividend payouts in July last year in response to the Covid-19 pandemic, housebuilder and FTSE 100 Index constituent Barratt Developments confirmed that it would reinstate its payout in February following a better-than-expected first-half performance.

During January, the FTSE 100 Index fell by 0.8%, while the FTSE 250 Index declined by 1.3%. Investor sentiment was affected by renewed lockdown measures introduced in response to the continued spread of the Covid-19 virus, including plans for incoming travellers to enter quarantine on arrival for ten days in Government-provided accommodation. The yield on the FTSE 100 Index eased from 3.70% to 3.69% over the month, while the FTSE 250 Index’s yield fell from 2.32% to 2.30%. In comparison, the yield on the benchmark UK gilt rose from 0.20% to 0.33% over January.

Over January as a whole, the best-performing FTSE industry sectors included industrial transport, food & drug retailing, and industrial metals & chemicals. At the other end of the performance spectrum, the worst performers included oil & gas producers, aerospace & defence, and life insurance.


globe-americas US Market Review

President Biden takes office

Politics and economics were intertwined in the US during January as President Joe Biden took office. America’s 46th President has inherited a faltering economy, a huge government debt, a coronavirus pandemic that continues to spread and – perhaps paradoxically – a booming stock market. During January, the technology-rich Nasdaq Index hit a new all-time high, ending the month 1.4% higher. Meanwhile, the Dow Jones Industrial Average Index fell by 2%, while the S&P 500 Index declined by 1.1%.

‘”The smartest thing we can do is act big” (Treasury Secretary Janet Yellen)

The US economy lost 140,000 jobs during December, representing its first net job losses since April 2020, with the leisure and hospitality industries particularly badly affected. 10.7 million people remain out of work and, while this number is much lower than its April 2020 high of 23.1 million, it is still almost double its pre-pandemic level of 5.7 million. Having fallen in December, US consumer confidence improved “moderately” overall during January, according to the Conference Board’s Consumer Confidence Index, although consumers’ sentiment towards their current situation remained weak.

Following riots at the US Capitol early in January, the House of Representatives voted to impeach former President Donald Trump for inciting violence. His trial is scheduled to take place during February. This is Mr Trump’s second impeachment, following a previous trial early in 2020.

Ahead of his inauguration, President Biden announced his US$1.9 trillion “America Rescue Plan”, which includes an increase of US$1,400 in stimulus payments to most households, and extensions to unemployment benefit and rental assistance. However, the package has yet to get past Congress.

President Biden appointed former Federal Reserve (Fed) Chair Janet Yellen as the country’s first female Treasury Secretary. However, the Republican Chairman of the US Senate Committee on Finance warned Ms Yellen that it was “not the time to enact a laundry list of liberal structural economic reforms”. Commenting on President Biden’s rescue bill, Secretary Yellen observed: “Neither the President … nor I propose this relief package without an appreciation for the country’s debt burden. But right now, with interest rates at historic lows, the smartest thing we can do is act big”

The International Monetary Fund (IMF) upgraded its forecast for US economic growth this year from 3.9% to 4.3% and expects the economy to return to pre-pandemic levels of activity by the end of this year.