The last month has seen considerable market activity resulting from significant news. First, we have had the results of the US presidential election. Joe Biden has won, but not quite with the clean sweep that many had expected. Indeed, the Democrats failed to gain control of Congress and the Senate remains in the hands of the Republicans. This is significant as it will hinder the Biden administration. There were plans for considerably increased spending and taxation which will now have to sit on the side-lines. This is not bad news for the stock market: corporation taxes are unlikely to climb which should prove to be positive for earnings going forward. Additionally, Biden should be more predictable and less erratic than his predecessor. In our view, global trade tensions are likely to ease which will benefit commerce. A more predictable and certain path is almost always good news for business and in turn the stock market.
Secondly, we have received very positive news on the arrival of a vaccine to combat Covid-19 meaning that there is light at the end of the tunnel for this dreadful pandemic. That is not to say that the next few weeks and months will not be challenging and infection rates seem to be increasing as winter unfolds. However, there is now some certainty that the end is in sight.
Unsurprisingly, markets have jumped as a consequence and some market trends have reversed. For example, value funds are now beginning to outperform while more growth-orientated strategies are beginning to lag. It has been a difficult few months for many value funds and investors have had to be patient but these funds are now starting to produce the returns that might have been hoped for.
It is interesting to note the way markets have reacted and this reaction is not always logical. Take the insurance industry, for example. You might not necessarily have considered insurers to be the natural beneficiaries of the arrival of a vaccine, however, the rise in financials seems to have also lifted the value of insurance companies. Markets sometimes work in mysterious ways.
Global indices have been led higher by the UK market which has been a long-term underperformer, particularly since the outbreak of the pandemic. Therefore, it is perhaps not surprising that it has rebounded most strongly with the arrival of a vaccine. The UK market was recently trading lower than 5,800 which was a level that we first saw in 1998. This means that it has effectively travelled sideways for the last 22 years. This underlines the danger of buying an index fund when markets are trading at expensive valuations as you may have to wait a long time before you make any material capital gains.
Turning to the outlook for markets, it will be important to keep a close eye on infection rates over the winter months, particularly in the US where new cases of Covid-19 are reaching worrying levels and hospitals are beginning to fill up as a consequence. A further fiscal stimulus package might be required to help businesses endure these difficult few months, particularly if they are forced to impose lockdowns.
Secondly, Brexit negotiations are in their concluding stages. These of course will have very important repercussions for the long-term prospects for the UK. Hopefully, politicians will reach a positive agreement which will allow significant levels of trade between the UK and Europe. However, the prospects of a hard Brexit or a poor trade settlement have not gone away. Nonetheless, any greater clarity on this situation will allow us to plan for the coming years.
Jason Broomer, Investment Director