Merry Christmas and a not so Happy New Tier

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I have spent much of this year in this commentary discussing ad nauseam two topics – Covid and Brexit – and unfortunately we need to end the year focusing on these very two same subjects.

I am – but really shouldn’t be by now – surprised that yet another ‘final’ Brexit deadline has come and gone with no agreement reached, but talks still continuing. Fishing and state aid remain the two sticking points as they have been for a while and No Deal worries are once again to the fore.

The pound has fallen back 1.5-2% this morning to $1.32 and €1.09. These moves in the grand scheme of things, however, are not that large. This may well be because no-one – and for all we know this may well include the key players – is still any the wiser as to whether we end up with a Deal or not.

It may also be because No Deal and Deal are now not actually so very different. No Deal will certainly cause more disruption near term but mounting chaos at the ports already means this just amounts to more of the same.

The virus mutation and new lockdown measures can only put further downward pressure on the UK economy near term. A contraction was already looking likely in the fourth quarter and this could now extend into the new year if the lockdown continues.

Matt Hancock has said that the latest restrictions could be with us for months. But while this could clearly turn out to be the case, one thing we should have learnt by now is not to trust the government’s forecasts for a few weeks ahead, or even for that matter a few days, let alone a few months.

Any contraction should anyway be considerably smaller than that seen in the spring. Retail sales for instance fell a sizeable 3.8% in November due to the lockdown but were still up on a year earlier. Much reduced spending on services is being replaced to some extent at least by higher spending on goods.

Equities at the time of writing are down 2-2.5% today but still up on the month. The key to whether the current relatively modest correction turns into something more serious will be whether the vaccine roll-out proceeds smoothly and the vaccines prove just as effective against this new more infectious mutation.

It is early days but the epidemiologists appear fairly confident that the vaccine will remain effective. As for the roll-out, rather surprisingly, so far at least it seems to be a model of efficiency in the UK.

If so, markets should continue to take heart from the prospects for a strong economic recovery from the second quarter by when a significant proportion of the population should have been vaccinated. We continue to believe equity markets have further upside over the coming year even if Brexit and the renewed lockdowns cause some further near-term weakness.

While in the UK and Europe the news in the last week has been all doom and gloom, there has actually been some good news in the US. After months of wrangling – and at the eleventh hour – Congress and the President have finally reached agreement on a fiscal stimulus package totalling $900bn or 4% of GDP. This replaces the previous Covid support package which expired as long ago as July.

This year’s market moves have been extraordinary in many ways. Even though we believe it is justified, it is still somewhat mind-blowing that many equity markets are ending the year at all-time highs while we remain in the midst of a global pandemic and the global economy is still recovering from one of the worst recessions ever.

Just as incredible and much harder to justify is the price of Tesla. This soared further last week ahead of its official entry into the world of grown-ups, with its inclusion in the S&P 500 index. Tesla is now worth more than all the other car manufacturers put together. This seems to be a fitting note to end on: as Christmas is, after all, the time of fairy tales.

On behalf of Kingswood, I would like to wish all our clients a merry festive season – or as merry as it can be given the circumstances – and a much better 2021.

Rupert Thompson

Chief Investment Officer