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Brooks MacDonald Weekly Market Commentary | Vaccine distribution continues to be key focus for investors

Please see below for the latest Brooks MacDonald Weekly Investment Bulletin received by us yesterday 01/02/2021:

Vaccine nationalism raises its head as competing contracts and supply issues collide

A bout of risk off sentiment hit equities, bringing most European and US indices slightly negative for the first month of 2021. The risk of a vaccine trade war, less positive data from Johnson & Johnson’s vaccine and the risk of further COVID-19 restrictions all dampened the mood. Friday saw a bubbling over of increasingly hostile words between the EU and AstraZeneca. In short, the EU imposed the right to ban vaccine exports outside of the EU (and select countries) and effectively imposed a hard border between Northern Ireland and the Republic of Ireland. This proved only temporary, with the hard border reversed and the prospect of export bans to the UK played down as Friday and the weekend progressed. So called ‘vaccine nationalism’ has been a threat for several months as issues over regional supply chains combine with the sequencing of competing contracts and an increasingly frustrated populace. On Sunday, the UK announced that it had provided almost 600,000 vaccinations in one day (over 1% of adults), which may suggest that as supply increases, countries will be able to work quickly to inoculate their populations.

Markets look ahead to Friday’s US employment data after last month’s disappointment

This Friday sees the important non-farm payroll US employment figures released. Last month saw a decline of 140,000 jobs1 , the first decline since the first wave of the pandemic. This month economists are expecting a 50,000 increase and therefore for the headline 6.7% unemployment rate to remain stable2 . US economic data has shown resilience in the face of the current COVID-19 wave but there is still a large amount of spare capacity in the labour market, something that may curb any bubbling inflationary pressures. With employment a major item on President Biden’s agenda, it seems likely that the US Stimulus Package will move through Congress under the Budget Reconciliation rules. The downside of using this process is that there is a limit on the scope of the legislation and a limit on the number of times the process can be used.

US stimulus may progress using the budget reconciliation process but this has limits

The prospect of using the budget reconciliation process has dampened expectations of a bipartisan agreement that could leave the door open for further stimulus over the coming months. The reconciliation process means that the bill can pass with a simple majority in the Senate rather than being held up by the filibuster. The reconciliation process has historically only been used once per calendar year due to its inbuilt limitations, so there will be additional scrutiny on the proposed package if it is expected to be the only US stimulus in 2021.

Weekly investment bulletins like these are a good way to get regular input from market experts. 

The mass rollout of the vaccine is set to cause gradual change to the market outlook, hopefully life and economies will improve.

Please keep up to date with our blogs.

Keep safe and well.

Paul Green 02/02/2021

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Jupiter Asset Management: All I wanted for Christmas, a deal

Please see article below from Jupiter Asset Management received 29/12/2020:

So the UK and the EU have a deal, at last. As I have long anticipated, the potential damage to both sides from a ‘no deal’ – exacerbated by the ongoing impact of the pandemic and lockdowns – was too great to go down that road, and for all the inevitable bluster, threats and counter-threats along the way since Brexit, we have an eleventh hour agreement. Skinny, lightweight, the bare minimum required – one can anticipate the headlines – but a deal nevertheless. This has to be good news for investors in UK equities and, after a very trying year, perhaps the best Christmas present many could have hoped for.

That said, it was probably a consensus expectation among domestic investors that a deal would be reached, so reactions may be relatively muted compared to the reaction had one not been formed. That scenario would probably have seen significant further weakness in Sterling, sharp falls in domestically focused companies and resilience from multinational companies benefiting from the currency’s fall.

As it stands, there is a high likelihood the pound will appreciate, but in all probability only modestly. Relief, the avoidance of a bad outcome and the ability to look beyond this all-consuming negotiating deadline would then buoy sterling assets. Companies reliant on domestic economic activity – retailers, housebuilders, selected leisure and financial companies – should be the most direct beneficiaries. Whilst gains in multinationals will probably be more muted, given the currency headwinds, it is likely they will rise, in the hope that global investors will once more regard the UK stock market as ‘investable’ rather than a pariah of uncertainty.

But the recent sea change in sentiment towards ‘value’ stocks relative to ‘growth’ stocks, spurred by positive vaccine news, has seen some notable gains in many of these domestically oriented businesses already, which must to some extent limit the potential for further progress on ‘deal relief’.

Moreover, for the international observer, the UK economy has suffered a greater hit to economic activity than other European countries, more reliant as it is on consumption, services and leisure over manufacturing. The costs to the Exchequer of support during the pandemic have exacerbated the country’s ‘twin deficit’ problem, necessarily capping any rise in the pound. Political leadership in the UK during the coronavirus has not exactly outshone peers, to put it gently.

Global investors may well bide their time to see how the UK does indeed fare in its newly negotiated relationship with the EU before plunging back into UK equities. Any January scenes of lorry queues at British ports (of which we have of course already had a foretaste), reports of obstacles to the smooth passage of goods or an inability of supermarkets to source avocados – heaven forbid! – will only encourage such investors to stay their hand before rushing to take their underweight exposure to UK stocks back towards a neutral (or even overweight) position.

Non-UK companies looking to acquire UK assets may be rather quicker off the mark, however. Merger and acquisition activity has been picking up, and an end to ‘no deal’ uncertainty may well spur more international companies or private equity firms to press ahead with plans to acquire UK assets in a currency still cheap on ‘purchasing power parity’ yardsticks.

So, a deal is undoubtedly good news for investors in the UK. But reactions are likely to be modest rather than dramatic. I expect overseas flows into UK stocks are likely to build slowly over time. All too soon the focus will return to navigating this difficult virus-impacted winter, to partial lockdowns, rising unemployment and frustratingly slow progress towards mass vaccination and scalable testing. The UK finding its way out of the pandemic and its way in the world outside the EU will quickly fill the news pages emptied of stories about the trade negotiations.

Please continue to utilise these blog posts and articles to help keep your own view of the markets up to date. Articles like this are good to get an understanding of the ‘hot topics’ currently driving markets.

Keep safe and well.

Paul Green

30/12/2020

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Brooks McDonald Weekly Market Commentary: US politics set to dominate the week ahead

Please see below for economic and market news from Brooks McDonald’s in-house research team posted 05/10/2020:

In Summary

  • Donald Trump’s hospitalisation rattled markets last week but reports that he is recovering buoy sentiment
  • US Stimulus talks remain ongoing but the two sides are still far apart, raising the risk of further delay
  • Barnier’s talk with EU countries over the UK fisheries policies suggests possible compromise ahead

Donald Trump’s hospitalisation rattled markets last week but reports that he is recovering buoy sentiment

After a weaker Friday, the expectation that Donald Trump may be released from hospital as soon as today has helped markets start the week in positive territory. US politics is certainly the key topic at the moment with investors trying to weigh up the probability of a Biden ‘clean sweep’ but also whether any US stimulus will come prior to the election.

US Stimulus talks remain ongoing, but the two sides are still far apart, raising the risk of further delay

Last week saw a volatile Presidential debate and the hospitalisation of Donald Trump due to COVID-19. It is still too early to say whether the latter has had any impact on polling. The two polls which took place during Friday and Saturday (when the news had broken) suggest Joe Biden’s lead remains intact but further information will be needed. Previously, investors were favouring a Trump re-election given the continuity and more market friendly policies. As the risk of a contested election rises and stimulus is delayed, the preference of markets appears to be shifting towards a comprehensive Joe Biden win. The logic is that a clear win is difficult to legally challenge by Donald Trump but also that it will allow significant fiscal policy to be unveiled. The less market-friendly policies are unlikely to be tabled whilst the US is focusing on the economic recovery and this buys time. Over the weekend, Donald Trump tweeted in support of stimulus, asking lawmakers to ‘work together and get it done’ however the gap between the Democrats and White House still appears to be significant.

Barnier’s talk with EU countries over the UK fisheries policies suggests possible compromise ahead

We have learned not to hold our breath on Brexit trade talks but despite the recent bluster there are signs that both sides are getting closer to a deal. While little concrete information came out of the call between Johnson and von der Leyen on Saturday, both sides stated their commitment to finding an agreement. The Financial Times suggested yesterday that EU negotiator Michel Barnier was set to have talks with EU countries impacted by the fisheries policy. This would suggest movement on one of the main sticking points alongside the role of state aid. US politics is likely to dominate the week ahead with European COVID-19 cases rising steadily in the background. Paris is shutting all bars from Tuesday amid a continued increase in cases. In the UK, hopes that cases had slowed last week were quashed as 16,000 cases were found to be unreported between 25 September and 2 October. This week we will also see the releases of the services and manufacturing Purchasing Managers Indexes across the world, with most countries reporting today and the UK tomorrow.

Although current global events may cause market researchers and analysts to concentrate heavily on certain areas of the market (in this case the US Election and it’s effect on the US Economy), it is important that we keep our views as holistic as possible and consider the whole market. Events such as the US election can have a knock-on effect on a wide variety of market sectors, and it is important to understand the reasoning behind these effects.  

Please keep reading our blogs in regular intervals to keep your view of the markets well informed, holistic and up to date.

Keep safe and all the best

Paul Green

06/10/2020