‘Unprecedented’ was, without question, the most overused word of 2020. In this review of the past year, we will endeavour to unpack a few of the key points, without writing something that rivals ‘War and Peace’ in length.
Soon after the identification of a novel coronavirus in early January, COVID-19 spread from Wuhan, China, across to Europe and the rest of the world. In early March, the WHO assessed COVID-19 as a pandemic1. The resulting lockdown, requesting people to stay home, protect the NHS and save lives2, saw much uncertainty across the UK economy, with the largest monthly fall in GDP being reported in April, since records began in 19973.
As the national lockdown lifted following a decline in cases, thoughts of a second wave were pushed to the back of the nation’s minds. Further hopes of an economic recovery were fuelled by the government’s promise of a world-beating ‘Test and Trace’ system4 and the introduction of ‘Eat Out to Help Out’ to support the struggling hospitality sector, with £849 million being claimed through the scheme by 30th September5.
However, any hopes of a recovery were short-lived come Autumn, with the announcement of a regional-tiered system, talk of a short, sharp ‘circuit breaker’ lockdown and followed by the implementation of a second national lockdown to prevent a medical and moral disaster for the NHS6. Nevertheless, the world hailed the announcement of the first Pfizer/BioNTech vaccine, showing over 90% effectiveness against COVID-197, and the global stock markets surged as a result. Meanwhile, due to the spread of new variants, the Christmas relaxation rules were soon abandoned, and the race to get the population vaccinated began, as the nation looked towards 2021.
Turning to the stock markets, which started last year on tenterhooks, as the S&P 500 recorded its 11-year ‘bull market’8 with continuously rising prices. It could be argued that there was complacency in market returns, as investors had become accustomed to global equity indices reaching all-time highs and valuations drifting further from historic averages. However, the opportunity cost of sitting on the side-lines was too great. Despite news of a fast-spreading virus in China hitting headlines in early January, few would have comprehended that by the end of the first quarter, the UK would be forced indoors to protect the NHS. The national lockdown brought about an economic crisis, as UK GDP declined 20.8% in the second quarter9, while businesses and society scrambled to adjust to the new challenges of an unfamiliar world.
The great equity bull market ended, with global equity markets plummeting at the end of the first quarter10. The bear market (where prices are falling) was sharp and brief, due to the scale of the stimulus that ensued. Government and central banks flooded the economy with stimulus and the backdrop of near-zero interest rates paved the way for governments to announce policies focused on stimulating demand, injecting billions to support flagging economies. With real interest rates (interest rates that have been adjusted to show the effect of inflation) offering negative returns, investors looking to recoup losses turned once again to the solace of equity markets11.
The technology sector boomed as investors sought companies providing online solutions throughout the pandemic, as evidenced by the tech-heavy US NASDAQ returning 37% in the second quarter12. UK equities contended with stricter lockdown measures, and the commodity-focused FTSE fell further behind global peers13. The value-orientated (value refers to stocks being considered cheap compared to peers) index was hit badly, as companies scrapped or significantly cut dividends. Former FTSE oil and gas giants contended with an oil price crash14, and financial companies faced higher default rates and lower interest revenues15.
Then, COVID-19 cases fell in the UK as we headed into the third quarter16. Restrictions eased, and consumers ventured out – to the relief of struggling businesses. Vaccine progress was reported by a host of pharmaceutical companies, spurring consideration of how nations were to mount a pandemic-level vaccination programme.
Across the pond, the Democrats and Republicans fought the last leg of a tightly contested election campaign, culminating in a decisive yet contested Biden victory, with the prospect of a full sweep in the US Congress17. In the last months of the year, a second wave of the virus ruined all hope of a V-shaped recovery, forcing the economies across Europe to partially shut down economic activity once again18. Despite finishing the year with record levels of rising virus cases, most global equity indices recouped losses from the sharpest stock market crash since the 2008 financial crisis, to sit near all-time highs once again19.
Back in the UK, Brexit had a 31st December deadline which went down to the wire. Despite providing the relief we all need currently, the argument that this ‘puts Brexit to bed’ is not necessarily strictly true. The deal itself, perhaps inevitably, consists of a significant number of compromises that enable both the UK and EU the ability to simultaneously claim victories, whilst providing ample opportunity in the longer term for blaming one another. As the fishing industry became the red herring (sorry) of the negotiations20, it has since emerged as the first sign that there will economic consequences for many sectors, some of which were not immediately obvious21. There will of course surely be economic benefits, but these may take longer to materialise.
Without testing your patience, here are a few things that have stuck out to us in the deal:
- The deal or agreement that has been put in place will be reviewed every five years which coincides with the next general election – hence ongoing negotiations will likely occur.
- For goods sectors, the deal is better than the World Trade Organisation terms – the hardest forms of Brexit. Nevertheless, trade will still face significant non-tariff barriers22.
- The service sector, which makes up nearly 80% of the UK economy, will have only very loose commitments on market access and no ‘equivalence’ on financial services has currently been agreed. Equivalence is an agreement between regulatory authorities to offer each other’s financial institutions similar frameworks and safeguards, which allows easier trading23.
- Financial services, an area that the UK arguably has had an advantage over the EU, had very little coverage in the agreement. The deal includes an arrangement to reach a memorandum of understanding by March 2021, which might mean the UK and EU will come to decide on equivalence. This would provide much needed reassurance but can be withdrawn by the EU at any time24.
All in all, the negotiations surrounding Brexit are likely to continue in the future and opportunities may take some time to show themselves.
A major shift in working patterns took place last year, as all non-essential workers were asked to work from home after the announcement of the first lockdown back in March. Of those who were working at home in April, 86% did so because of the COVID-19 pandemic25. Although it could be argued that working from home has resulted in increased productivity and better work-life balance for individuals, many businesses who have been unable to adapt to this new way of life have struggled. For example, December saw the fall of the Arcadia Group, as it was forced to shut its vast network of retail stores after failing to compete with other online retailers26.
As the world has adjusted to living with COVID-19, global CO2 emissions have dramatically fallen. The annual decline in 2020 is the largest absolute drop in emissions ever recorded, and the largest relative fall since the Second World War. April reported the peak of the decrease, with daily fossil CO2 emissions being 17% below their average 2019 levels27. Further hopes for minimising the impacts of climate change are mirrored by the outperformance of sustainable investment projects compared portfolios without a focus on environmental, social and governance factors28.
Additionally, Prime Minister Boris Johnson announced his ’10-point’ net-zero plan for climate change, including the ban of sales of new petrol and diesel cars from 203029. Electric car maker, Tesla, saw share prices soar, as the switch to electric vehicles began30 and became the world’s most valuable auto manufacturer 31, tipping Toyota. The meteoric rise, despite scepticism surrounding the company’s financial health, illustrates the growth potential for sustainable technology, and for finding solutions to the larger crisis we find ourselves in.
2020 was a testing year for everyone and, although 2021 may not be the triumphant resurgence we all want, the green shoots are there. Hopefully, as the vaccination programme makes headway, a clear path back to the new normal will be found.
Throughout 2020 we have tried to keep our clients informed and up to date with the latest investment news and digest, and we will continue in the same vein this year. In the coming weeks, we will publish our views for 2021 and we will continue to write to you regularly.
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