Investment Strategy:  First Quarter 2021 – Macro…Recovery in sight

Infection rates are soaring and tightening lockdown restrictions mean a horribly challenging next few months. Nevertheless, and without wishing to tempt fate, the mass immunisation programme means that the end of the global health crisis should at least be in sight, even if the economic fall-out is only really beginning. Such has been the trauma of the pandemic that the appalling economic data last year was to an extent ignored, especially as it was obscured by the huge support policies implemented by Central Banks and Governments. As 2021 progresses the economic cost of the pandemic will be front and centre as the authorities begin to change their mindset from short term economic necessity to the longer term viability of the public finances. 

As is oft said, forecasting is difficult, especially when it is about the future. The economic outlook is improving but returning to a semblance of normality will be dependent on how quickly and successfully the global immunisation programmes can be rolled out. The next few months will be tough as the global economy copes with the economic fallout of the current huge rise in infections at the most vulnerable time of the year for public health in western developed economies. Nevertheless, after an estimated 4.5% fall in global GDP in 2020, the global economy is set to recover strongly this year, led by the Chinese and Asian economies which have successfully contained the pandemic and are already performing robustly. Battling deflation and recession will continue to be the main focus of Governments and Central Banks but at some point in the coming years the massive public debt will need to be reined in. Whether this is through growth, inflation, austerity or higher taxes is a moot point but one that will have great significance for financial markets. Thank you as always to Schroders for providing the current consensus forecasts from the great and good, and which show the extent to which the UK with its heavy reliance on consumption and service industries and dearth of manufacturing has been particularly hard hit.

The scale of government borrowing needed in all countries has been staggering. The UK government plans to borrow a total of £400bn during this fiscal year, around a  fifth of our GDP yet the UK economy is estimated to have shrunk by around 11% in 2020, the largest fall in peacetime history, and unemployment could reach 10% by the middle of this year. The Office for Budget Responsibility (an unintentionally ironic title given the current state of public finances) predict the economy won’t get back its pre-pandemic size until the beginning of 2023, maybe longer given the unquantifiable fallout from Brexit. The key to the UK recovery will be the extent to which the savings accumulated during our lockdowns will be either unleashed in an orgy of shopping, entertainment and travel as we enjoy our new freedoms in the second half of the year or else remain under lock and key as households remain fearful as to their future employment prospects. 

The UK debt is being issued by the Treasury with much of it being bought by the Bank of England, an unprecedented monetary experiment with no idea as to the long-term consequences. The use of monetary policy as a tool to finance fiscal spending is a worrying concept and calls into question the supposed independence of Central Banks from Government control. The situation is sustainable for now because interest rates are so low, so in effect the government is borrowing at virtually no cost. The hope is for a rapid bounce in growth to create jobs and bring relief to our battered economy and minimise the fiscal tightening needed to stabilise the national debt. Nevertheless, a strengthening economy has a sting in its tail as it could bring rising interest rates and bond yields, thereby making future refinancing costs more expensive.

Deflation and recession remain global public enemy number one for now and will continue to be the main focus of Governments and Central Banks. Financial conditions remain remarkably benign with global interest rates anchored near zero seemingly indefinitely. Inflation is a worrisome tail risk and it is going to take the very best efforts of the authorities to guide us through the coming years. It is thus heartening to see the appointment of ex-Chair of the US Federal Reserve Bank, Janet Yellen, as Biden’s Treasury Secretary which should mean that after the divisiveness of the Trump Years the Biden Presidency will see the White House and The Fed working hand in glove to ensure the best outcomes for the US economy. At a parochial level it is also pleasing to see Dan Rosenfield replacing Dominic Cummings as Boris’s chief of staff which should bring back some credibility and stability to No.10 at a time when it is most needed.

A parting of ways…

Brexit and Trump have tormented investors for the last four years but finally, exhaustingly, and above all thankfully, we can now move on. A deal, however minimal, has been struck and with Trump no longer residing at 1600 Pennsylvania Avenue hopefully markets can look forward to calmer and more predictable political waters.

No, I haven’t read all 1246 pages either and maybe it is only the bare minimum of a deal but it’s a mighty relief for investors in UK assets after such a grim year. This will not precipitate a wholesale move back into the UK by international investors who will wait to see how our new relationship with our EU cousins plays out, but it removes the UK’s ‘pariah status’ and makes us investable once again now the Sword of Damocles is back in its scabbard. M&A activity could well pick up more rapidly however as international and private equity buyers look to take advantage of a still cheap sterling and the threat of a no-deal removed. 

Was it all worth it? The true disciples saw Brexit as regaining our sovereignty, taking control of our borders and replacing the autocratic, bureaucratic, interfering, sclerotic European rule with a low regulation, low tax, ‘Singapore on Thames’. Many though who voted for Brexit were the ‘left behind’ communities who had suffered from a decade of austerity and believed the simple promise that Brexit was good for them. Any chance of testing this hypothesis has been blown away on the hurricane of the pandemic. Policy by necessity is now focused on greater State intervention in a world where national self-interest will predominate as governments try and rebuild their shattered economies and manage the ever growing mountain of public debt. Not too much low regulation, low tax and free trade in that. 

The election of Joe Biden should bring a more conciliatory tone to both US domestic and foreign policy which is to be welcomed. A Democrat Presidency would traditionally be seen as heralding higher taxation and greater regulation, and as such not necessarily market friendly, but in these extraordinary times the attention this year will be on containing the pandemic and bolstering the economy. The victory of the two Democratic candidates in the Georgia Senate run-off election gives Biden his ‘Blue Sweep’ and control of both Houses of Congress making it far easier for him to pass legislation, especially in more contentious areas such as healthcare and climate change. As for Trump’s exit, it’s shamefulness that defined his Presidency.

The pandemic is a public health catastrophe and an economic calamity but also has far-reaching political and social implications. It has radically changed the way we think about the sort of world in which we wish to live, with issues of social justice, racial and religious tolerance, the environment, and income inequality now far more increasingly to the fore as (hopefully) we strive to build a fairer and more inclusive society. This requires a less divisive, more consensual and forward-thinking, statesmanlike style of government which hopefully the election of Joe Biden will herald on the global stage.

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