News

Please see below update received from Brooks MacDonald earlier today, which analyses global market performance over the past few days.

What has happened

With US markets closed yesterday, equity moves were fairly small and we saw more of a consolidation than any momentum one way or another. That said, European and Asian markets did gain ground with the latter helped by the strong Chinese GDP data at the start of the week.

Yellen’s confirmation hearing

Later today, Janet Yellen, former Fed Chair will set out her plan to the Senate finance committee ahead of her confirmation as Treasury secretary. The prepared remarks have already been leaked and the highest profile phrase is that ‘the smartest thing we can do is act big’. Yellen is expected to reiterate the need for fiscal spending saying that the downturn in the economy could lead to a ‘longer, more painful recession’ if stimulus bills such as that proposed by President-elect Biden falter. The first test for the new President will be the passing of $1.9 trillion of relief measures which may prove challenging given the tiniest of working majorities in the Senate. There will inevitably be questions about the longer-term funding of the deficit created by these measures and the interactions between the Fed and Treasury given Yellen’s former role.

COVID Update

Cases remain elevated across Europe but there are signs that the tougher restrictions are starting to work with Italy seeing its daily cases fall below 10,000 for the first time this year and the UK dipping below 40,000 as Lockdown 3.0 takes effect. Germany is also expected to extend its lockdown further due to concerns over the new variants after being in heightened restrictions for several months. On the vaccine there continue to be impressive numbers out of the UK which is one of the fastest moving of the major economies. The EU are also seeking 70% of the bloc’s population to have had the vaccine by the summer so signs of momentum, or at least ambition, building. In less positive news, California’s state epidemiologist has recommended the pause of the rollout of the Moderna vaccine after severe allergic reactions.

What does Brooks Macdonald think

Yesterday saw a brief lull in market activity after an eventful start to 2021, with central bank meetings, politics and earnings this is unlikely to last too long. Against this backdrop the vaccine rollout has begun in earnest which means that with each passing day the economic risk of reopening marginally reduces. Of course, the question for governments will be what proportion of the population needs to be vaccinated before the risk of the virus is ‘acceptable’, expect this to be a major debate in Q2 2021.

Please check in again with us soon for further relevant content and news.

Stay safe.

Chloe

19/01/2021

Please see article below from J.P. Morgan received this morning – 18/01/2021

When will the vaccines allow for a sustained economic recovery?

15-01-2021

For months, the question on everyone’s lips has been, ‘When can we start getting back to normal?’ The short answer is, ‘When the vulnerable have been vaccinated and the healthcare systems are comfortably coping with Covid-19 cases’. The more complete answer is a little more complex. Protecting the vulnerable will facilitate the process of a sustainable reopening but caution will still be required until a broader group are vaccinated, and the timetable will differ around the world. Our base case for major developed economies is that the process of sustainable reopening begins in the spring, and in the latter months of the year we see a meaningful bounce in economic activity as pent-up demand is unleashed.

The charts in this report will be updated twice a week in our tracker for readers to follow the progress of the vaccine rollout.

Vaccinating the vulnerable should drastically reduce mortality and hospitalisations from Covid-19

Governments around the world are adopting strategies to vaccinate the most vulnerable first, which should reduce mortality from the virus but also ease the burden on healthcare services. This approach makes sense given Covid-19 causes a disproportionate level of deaths and hospitalisations among older cohorts. In the UK, there are nine million people aged over 70, accounting for 13% of the total population, but 84% of the total Covid-19 deaths and over 50% of total hospitalisations (Exhibit 1).

Exhibit 1: Demographics and Covid-19 in the UK

Source: Office for National Statistics, British Medical Journal, J.P. Morgan Asset Management. 
*Based on deaths in England and Wales where Covid-19 is mentioned on the death certificate.
**Based on an analysis of the first wave published in the British Medical Journal. Data as of 14 January 2021.

Throughout the Covid-19 pandemic we have seen how the health and economic crises have been inextricably linked. If vaccinating the vulnerable significantly reduces the number of new hospital admissions, then governments will feel more comfortable about relaxing restrictions, allowing economic activity to begin normalising.

The pace of vaccine rollout is key

At the time of writing, the UK and US have made solid starts in vaccinating their populations, while the major European economies are off to a slower start (Exhibit 2). 

Exhibit 2: Covid-19 vaccine rollout
Cumulative doses administered per 100 people

Source: Our World in Data, J.P. Morgan Asset Management. Data as of 14 January 2021.

The UK government has announced an ambitious plan to offer vaccinations to its top four priority groups – amounting to 15 million people – by 15 February. These groups include those over the age of 70, frontline workers and those that are clinically vulnerable. The time between first and second dose of vaccines administered in the UK has been extended to 12 weeks to allow as many people as possible to receive at least the first dose, which the government’s advisers view as the best way to reduce mortality and the strain on the health system.

How feasible is it to vaccinate such a large group of people in such a short space of time? In the 2019-20 flu season, the UK vaccinated over 14 million people over a five-month period. The UK health system already has significant experience in vaccinating millions, but it needs to do it around five times as fast as normal. Several mass vaccination centres are planned around the country to meet this ambition, with some vaccinating 24/7. The government has expressed confidence that this will provide sufficient distributive capacity to allow it to meet its goal, and that distribution needs will be met by the supply of approved vaccines, of which the UK now has three.

We think the target is broadly achievable. Whether or not it is achieved exactly to the day is primarily a political concern, but the proposition of having the majority of the UK’s vulnerable with some protection by the beginning of March ought to be a game-changer (as Exhibit 1 suggests) and allow for a process of sustained economic recovery to begin in the second quarter.

The rollout in the US and EU is likely to continue to lag the UK, but both should still have vaccinated the most vulnerable in the first half of the year. Both the Pfizer and Moderna vaccines are approved in the US and the EU, and sufficient doses have been secured to vaccinate the vulnerable population.

The EU, in particular, will benefit considerably if its regulators approve the AstraZeneca/University of Oxford vaccine in the coming weeks, since it has ordered doses to cover more than 40% of its population and this vaccine is logistically easier to handle (Exhibit 3).

Exhibit 3: Confirmed orders for vaccinations per head of population
Complete vaccination courses per head of population

Source: Duke Global Health Innovation Center, World Bank, J.P. Morgan Asset Management. This chart shows the number of complete vaccination courses that a given country has confirmed orders for. Data as of 9 January 2021.

The success of the three pioneering Covid vaccines will have a huge impact in taming the pandemic, but there are also many other vaccine candidates that could be approved in the coming months that would bolster the world’s supply. Novavax and Johnson & Johnson (J&J) are two of 20 vaccine candidates currently in phase III trials, and have large orders confirmed.

However, it is clear that the vaccine rollout will be unequal. The deep pockets of developed governments have allowed them to secure vaccinations to more than cover their populations. Lower-income emerging market countries have order books that fall short of their populations, giving them less room for error in their rollout strategies. As a result, many will have to rely on the COVAX scheme – a consortium set up by the World Health Organisation and others to ensure that all countries have access to Covid-19 vaccines – and can expect a slower return to normality. COVAX has large orders for the AstraZeneca/University of Oxford and J&J vaccines.

One part of the emerging world is less reliant on vaccines for its economic recovery: North Asia. Through effective testing, contact tracing and strict border controls, the region has been able to recover quickly without the help of vaccines. For investors in emerging markets, this disparate outlook calls for a selective approach. 

We are optimistic on the path of vaccine rollout, but mindful of tail risks

The rollout of vaccines in the developed world should allow economies to recover sharply in the second half of the year as normality returns and consumers are finally free to unleash their pent-up savings. We expect that the UK and US will have vaccinated over half their populations in the first half of the year, and the EU will reach that milestone during the summer.

The strong rebound in developed market activity should be supportive of risk assets, and in particular stocks that stand to benefit the most from a rotation from the Covid winners to those that lost out from the pandemic. Europe, the UK and the value style stand out in this respect. The emerging markets could also perform well in this environment, driven by continued strong economic performance in Asia and a gradual decline in the US dollar.

Of course, there remain risks. We are less concerned about the vaccine timetable slipping for logistical reasons, and think that plans could even be accelerated. Governments are under tremendous pressure to at least keep up with their neighbouring counterparts. And given the fiscal cost of maintaining economic restrictions, no expense will be spared in driving the rollout. 

Uncertainty around take-up is a hurdle for all countries, and surveys suggest a significant degree of scepticism for the Covid-19 vaccine in Europe. Experience in the UK suggests that as the vaccine rollout is proceeding, public confidence is growing, and many may feel increasingly confident of taking up the vaccine as time progresses.

The key risk is that the virus mutates to a new variant that makes the currently approved vaccines ineffective. There is also the risk that vaccine efficacy is lower than initially reported, either among the older population, or across the population from altering the time between first and second doses. Data from trials hasn’t been completely comprehensive in these areas. Many of these risks could be addressed – and rather than derailing the recovery completely, could just provide a setback while new formulations are found. However, we think it prudent for investors to maintain tail-risk protection such as through long-duration government bonds or dynamic fixed income and macro strategies.

A good update from J.P. Morgan with more positive news on the vaccine roll out.

Vaccinating the most vulnerable should drastically reduce mortality and hospitalisations from Covid-19. Hopefully, once the most vulnerable are vaccinated, governments will feel more comfortable about relaxing restrictions, allowing economic activity to begin normalising.

Please continue to check back for our latest blog posts and updates.

Charlotte Ennis

18/01/2021

Please see below article received from AJ Bell yesterday evening, written by their Investment Director, Russ Mould. The commentary indicates a positive start to 2021 in relation to UK equity markets and predicts market performance for the year ahead.

After a rotten showing in 2020, when the FTSE 100 ranked plumb last among major national indices on a local currency, total-return basis, the UK equity market is off to a flyer in 2021. Whether this is a simple case of every dog having its day or the start of a more fundamental turnaround will only become clear with the passage of time, but what is undeniable is that the FTSE 100 has just had its best start to a year in its history, using the capital return over the first five calendar days’ trading as a benchmark.

FTSE 100’s fast start looks promising for the rest of 2021, if history is any guide

“It is eye-catching to see how the FTSE 100 has generated positive capital returns on every occasion bar one when it has begun the year with an opening-week gain of 1% or more.”

The past is no guarantee for the future, as all advisers and clients know (and the numbers show that a bad start does not guarantee a bad overall outcome). Even so, it is eye-catching to see how the FTSE 100 has generated positive capital returns on every occasion bar one when it has begun the year with an opening-week gain of 1% or more. That exception was 1987 and even that year looked like plain sailing until October, although a nasty reckoning then followed with the Crash.

That episode shows that trouble can come when it is least expected and, as part of any risk-management review, advisers and clients will look at what can go wrong. There is a saying that “bull markets end when the money runs out” and, at the moment, there seems to be no shortage of cheap cash upon which financial markets can feast, as central banks continue to run ultra-loose monetary policy and governments around the world continue to provide fiscal support to their economies, racking up huge budget deficits in the process.

“Spotting misallocation of capital is important when it comes to market tops. In 1999–2000 and 2006–7, overpriced merger and acquisition deals had a role to play. So did a very active market for Initial Public Offerings (IPOs) and secondary sales of stock by either vendors or companies themselves.”

So perhaps advisers and clients need to start wondering where all of this money could go, or what could soak it up, to end the bull run. Spotting misallocation of capital is also key. In 1999–2000 and 2006–7, overpriced merger and acquisition deals had a role to play. So did a very active market for Initial Public Offerings (IPOs) and secondary sales of stock by either vendors or companies themselves. Many of those IPOs were in what turned out to be overpriced tech, media and telecoms stocks in 1999–2000, while miners and junior oil explorers, property stocks and financial investment vehicles took centre stage in 2006–7 (and more of the last-named in a moment), to eventual great cost to buyers of this new paper.

Some advisers’ and clients’ interest may therefore be piqued by the announcement of planned stock flotations by Moonpig, Foresight Group and Dr Martens at the start of 2021, even if the specifics of the individual companies will be left to their preferred UK equity managers to assess.

Functioning markets

In some ways, these new flotations could be a good sign.

They suggest that capital markets are working well and doing what they are supposed to do, which is provide capital that companies can use to invest and hire, create wealth and ultimately help the economy to grow.

Fund managers may also see them as a chance to buy into new, exciting stories that generate capital gains or welcome income over the long term for their clients, or at least offer the potential for a quick turn if a deal looks like it is going to be hot and the shares are going to spike.

However, a sudden flood of new market entrants might also be warning sign, on the grounds that you can have too much of a good thing.

“Not surprisingly given the circumstances, and especially last spring’s stock market rout, newcomers to the London market were relatively few and far between in 2020, although the pace did pick up in the second half and some deals, such as THG, proved to be absolute winners.”

Not surprisingly given the circumstances, and especially last spring’s stock market rout, newcomers to the London market were relatively few and far between in 2020, although the pace did pick up in the second half and some deals, such as THG, proved to be absolute winners.

Overall, the number of new issues and IPOs in London last year was the second-lowest since 2009 and the end of the Great Financial Crisis, according to data from the London Stock Exchange (only 2019 was lower).

New issue activity has been relatively quiet in the UK for some time

Source: London Stock Exchange

Over £7 billion was raised by primary offerings, the highest figure since 2017, and that exceeded the sums generated by market newbies in 2009, 2012, 2015, 2018 and 2019.

And with only a select number of names announcing plans for an IPO so far in 2021, it is too early to be pressing the panic button about a deluge of new issues swamping investors and snuffing out the UK market’s attempt to forge a sustained bull run.

The £7.3 billion raised in 2020 came nowhere near the £31 billion of 2006 and £27 billion of 2007, right before trouble hit and the bear market began, or the £18.7 billion peak of the prior cycle in 2000.

Warming up

But advisers and clients need to be on their guard. The US market has shown signs of an overheated new offerings market, especially given the post-listing surges in names such as Airbnb and DoorDash, the coming to market and the lofty valuations at which many new entrants have gone public and the torrent of Special Purpose Acquisition Companies (SPACs) that have listed, in a manner that is eerily reminiscent of 2006–7 on both sides of the Atlantic.

“The US market has shown signs of an overheated new offerings market. The UK is showing no real signs of any of those, which is reassuring, although advisers and clients will also want to keep an eye on secondary offerings too, since they can also soak up cash that could otherwise be deployed elsewhere.”

The UK is showing no real signs of any of those, which is reassuring, although advisers and clients will also want to keep an eye on secondary offerings too, since they can also soak up cash that could otherwise be deployed elsewhere.

Over 950 secondary deals, including rights issues, placings for cash, open offers, subscriptions and further issues took place in 2020, perhaps understandably as many companies tapped their shareholders for fresh liquidity to help see them through the pandemic and the subsequent recession. London-listed and quoted firms raised over £31 billion, the highest figure since 2008–9 when companies were again in cash-raising, crisis-management mode.

Secondary issuance began to pick up in 2020 as many firms scrambled for cash

Source: London Stock Exchange

That meant the total cash raised across primary and secondary deals reached nearly £39 billion, again the highest mark since 2009. Couple that with hefty cuts to dividend payments and a collapse in share buyback activity and it is no surprise that the UK stock market’s headline indices struggled to make headway in 2020.

Total UK equity issuance picked up in 2020 just as dividends and buyback activity fell

Source: London Stock Exchange

Watch the flow

Dividend payments are expected to rebound this year and buyback activity could conceivably start to pick up, too, should the global economy really begin to gain traction in the wake of vaccination programmes.

This remains far from certain, however, and advisers and clients do need to be on their guard in case the steady flow of new deals becomes a flood, especially if deal quality starts to flag and certain hot or popular sectors witness very high levels of activity. This is not a problem in the UK, as Foresight Group, Dr Martens and Moonpig all come from different sectors and industries, but advisers and clients might like to make sure that their chosen fund managers bear in mind Warren Buffett’s warning, should copycat deals start to proliferate:

“First come the innovators, who see opportunities that others don’t. Then come the imitators who copy what the innovators have done. And then come the idiots, whose avarice undoes the very innovations they are trying to use to get rich.”

We will continue to publish relevant market analysis and news, so please check in again with us soon.

Stay safe.

Chloe

18/01/2021