Fortnightly update, 13th November 2020
A huge amount happens in two weeks at present. Join us as we review the past fortnight’s global whirlwind of events.
When it comes to writing these updates and looking back at the previous two-week news cycle, it is easy to understand how people have become so exhausted by the news. With an unusually high number of government U-turns in the UK1, increasingly erratic behaviour from the current US president2 and COVID still causing havoc across the globe, it can leave little to feel positive about.
However, it is not all doom and gloom. An announcement from Pfizer has given hope that a vaccine could be available far sooner than expected3 and, despite Donald Trump’s best legal efforts, a different, more environmentally sympathetic administration in the US is perhaps within sight. At Holden & Partners, we have been following the US election closely and will be sending out an update including our views on Wednesday 18th November.
The Office for National Statistics has reported that Gross Domestic Product (GDP) growth for the third quarter is at 15.5%. This is the quickest rise seen since the growth rate began being measured in 1955. An impressive figure, but as we have mentioned previously, this measure is the rate of growth and GDP is still 9.8% behind where we were at the end of 20194. Whilst this is a positive sign, we are certainly not through the other side just yet. A huge boost to the economy can be attributed to the ‘Eat Out To Help Out’ scheme and the easing of lockdown over the summer. This is somewhat old news now, as the second lockdown will push the economy to contract once again5.
There were, however, some potential green shoots with the announcement of the vaccine efforts. Markets rejoiced as vaccine progression from US pharma giants Pfizer and Moderna lifted investor sentiment, after a period of rapidly rising COVID-19 cases across the US and Europe. The relief rally has been coined by many as yet another ‘rotation’, a term used by investment professionals to describe the shift of funds from one sector (groupings of companies that do similar things) to another. However, this is only one side of the coin, as the inflows in some sectors come from outflows elsewhere in financial markets. This is often categorised as growth vs value, or cyclical vs noncyclical.
In practice, this meant that losses in the Technology and Consumer Discretionary sectors made way for Energy and Financials outperformance, as pessimistic economic expectations that depressed the sectors were revised. FAANG stocks (an acronym used to describe some of the most prominent companies in the tech sector) experienced a rout, falling further than the broad technology sector, reflecting the pinnacle of growth at a time when investment managers are eyeing the return of value6. As can be expected when global risk is perceived to fall, the demand, and therefore prices, of seemingly risk-free assets such as sovereign and investment grade bonds also fell.
Issues surrounding the mass production, storage and distribution of the vaccine may yet impede the runaway optimism. Large pharmaceutical companies are already selling vaccine doses, with prices often undisclosed and highly variable7. Complex and super cold storage requirements of Pfizer’s leading vaccine will cause problems for highly developed countries, whilst the financial versus ethical debate will rage over affordability or access for lesser developed countries8. The success in the late stage trials puts the world on track to a return to normality, but the journey will not be a short, or inexpensive, one.
Governments often issue debt to fund important infrastructure projects as well as education, social services and health. In the UK, these government-issued debt instruments are known as gilts. Gilts can help contribute to important parts of public sector spending that improve the lives of citizens. However, in addition to supporting projects that offer social protection, sovereign bonds may also fund controversial practices that would not sit well in some sustainably focused portfolios. Defence spending is a real sticking point, as well as subsidies for industries that carry high environmental, social and governance risks.
A way to improve the alignment of government bonds with the objectives of responsible investment portfolios is to ring-fence the money raised through the issuance of bonds for allocation to sustainable or socially beneficial projects. Some governments, such as Poland and Ireland, have already issued green bonds which are used to raise funds to undertake activities which meet environmental criteria.
Rishi Sunak announced this week that the UK will join these countries in issuing green gilts9. The government will sell the first of these green gilts next year with the proceeds used to fund projects that contribute to reducing carbon emissions and help the country transition to a low carbon future10. It is hoped that these new environmentally friendly government bonds will help to achieve the net-zero carbon target for 2050. The government have faced pressure to issue such gilts and follow in the footsteps of other nations. These bonds not only help the move towards a less carbon-intensive economy, but also meet the needs of those wanting to build a balanced investment portfolio that contributes towards sustainable development.
We’ll catch up with you next on Wednesday 18th for our US election digest.
1 https://uk.news.yahoo.com/lockdown-latest-string-government-u-165119513.html
4 https://www.cnbc.com/2020/11/12/uk-gdp-q3.html
5 https://www.accountancytoday.co.uk/2020/11/12/uk-gdp-recovers-15-5-in-q3/
7 https://www.marketplace.org/2020/11/12/how-much-could-pfizer-make-from-a-covid-19-vaccine/
9 https://www.cityam.com/explainer-what-are-green-bonds-and-how-will-the-uks-first-green-gilts-work/
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