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Vaccine and Brexit breakthroughs?

What the recent market rally really means

19 November 2020

Our Chief Investment Officer talks about the US election result, a potential coronavirus vaccine, and the latest on Brexit.

The current landscape

It has been a newsworthy month with the US presidential election topping the bill. Although Joe Biden has won the election, it seems likely that the Republicans will retain a Senate majority. In terms of knowing what comes next, this is fraught with difficulty. Many of the predictions in the aftermath of the elections of 2000, 2008, and 2016 subsequently proved wide of the mark.

Encouraging news from pharmaceutical company, Pfizer, regarding a potential coronavirus vaccine provided a much need fillip to global share markets which soared on the news.

Meanwhile, the Biden administration is seen as less sympathetic to the Brexit project. Many commentators believe that this should incentivise the UK to secure a deal. Having said that, we still don’t see ourselves having an edge here.

In terms of tactical positioning, our convictions remain strong in emerging markets and developed world high yield credit.

Vaccine and Brexit breakthroughs?

As part of our aim to keep clients informed of our current investment views and how these themes are impacting your discretionary portfolios, Phil Attreed, Head of Investment Consulting, talks to Will Hobbs, Chief Investment Officer, about the US election result, a potential coronavirus vaccine, and the latest on Brexit.

Hello and welcome to this November Monthly Market Insights, where myself and Will will take a look back at the month that’s just gone and also look at the team’s expectations for the month ahead. I’m Phil Attreed, Barclays Head of Investment Consulting, and I’m joined today by Will Hobbs, our Chief Investment Officer, and he’ll be representing the views of a much wider group of asset allocators, economists, fund selectors, and portfolio construction experts as well that make up the group of investors that we have in the team. So, Will, I guess the first thing on our list has to be US elections. As we speak it’s not quite over just yet but it does look highly likely that the next president is going to be Joe Biden. We also won’t know until January whether or not he’s going to enjoy that very slim Senate majority or not but what are the wider implications for investors of this groundbreaking election so far?

Phil, yes, there’s a lot in there isn’t there? And you’re right. We’re not going to know until January where you get a couple of Senate runoff races in Georgia which will decide whether the Democrat Party can make it up to 50/50 in the Senate with perhaps Vice President or presumptive Vice President Kamala Harris being the deciding vote. The odds, betting odds market still suggests that actually Republicans will retain a Senate majority. Now we’re obviously seeing an awful lot of editorial ink spilled on the subject of what comes next, what all this means for everything, from climate policy to the US’s international relations, and all that kind of thing. It’s just worth bearing in mind that if we go back to a similar time in the aftermath of the elections of 2000, 2008, and 2016 similar regime changes, a lot in hindsight, a lot of that editorial ink looks like hot air. We didn’t predict very well or many didn’t predict very well what was coming next. So don’t waste too much time believing too much of everything that's said. Remember our view of the future is as limited as ever; the only thing I would say actually is that beware also those people who are calling these elections a death knell for democracy and similarly doom-laden predictions. There’s a famous Austrian political philosopher called Karl Popper who argued actually that democracy was not necessarily about finding the right answer all the time to who should rule; it’s more about peacefully transferring power. Now viewed from a few months hence, this could go down as exactly that: a great advert for democracy. And remember this was one where it had a record turnout, the highest proportional turnout we’ve seen in well over a century. So there’s aspects of this that are very encouraging for the democratic story.

Okay great thanks, Will. So the backdrop for this election has been the surging virus cases around the world and particularly in Europe and the US. And of course we’ve seen various European economies that have been pulling the shutters down again, the UK included in that with the national lockdown. But the market reaction has been pretty muted to all of this given the economic damage that we know that these shutdowns must be doing. And how would you explain that disconnect?

Yes, it’s a bit of a conundrum to some isn’t it, Phil, I agree. The market reaction has been quite muted. In fact today we’ve seen the MSCI All Countries World reach a fresh all-time price high so there is something that’s jarring investors a little bit or some of the news flow seems to be jarring against some of the price actions. I’d make three points. Okay the first one you could make is that conceivably markets are under reacting to all of this or maybe they’re over, on the flip side, they’re over pricing the potential for vaccines and improved health care to come along imminently and waive a magic wand and get us all back to some form of normality. That’s conceivable. The second point really does, I think, you could say that actually that vaccine story is incredibly important. So again today this morning there’s been some very encouraging news from Pfizer and others. News is expected soon and so that could change the economic terrain significantly if there was a viable vaccine widely distributed around the world in the first half of next year and that’s something that investors also have to consider. The final point I guess is really about the nature of this lockdown relative to the prior one and it’s notable that there are significant differences. This is more patchwork in terms of the sectors affected and it’s notable also that the most affected sectors are the ones that haven’t really been able to get off the floor from the blow landed by the first half lockdown. So in a sense the number of extra economic or the amount of extra economic damage those sectors can do to the economy in this lockdown is a bit less. That’s not a great story admittedly but there’s a number of reasons why you’d expect this lockdown to look a little bit less severe in terms of the damage it does to the statistics and people’s lives and businesses. But still it’s not it’s far from great news. I think just that people are looking to the other side and maybe looking to that vaccine story a little bit at the moment.

Quite. And yes, the disparity between those winners and losers has been quite stark over the last six months. So Will, finally, the other topic we’ve spoken about for many years, it seems now is of course Brexit. Hopefully we are in the closing stages of negotiations in the coming weeks. Where are we up to and I suppose from a positioning point of view within portfolios is there anything that you and the team are mindful of as we head into the end of the year?

Yes. We like, many other commentators are going to wonder what we have to talk about without President Trump and Brexit. We’re going to be back at deep-fried chicken and cricket, I guess, which won't attract very many viewers but we could have a little go I guess. But there are some actually who are arguing at the moment that the outcome of the US elections is quite relevant for the potential for a Brexit deal and they are arguing that because the potential Biden administration is seen as less sympathetic to the Brexit project that should incentivise the UK to a greater extent to land a deal, a more substantial deal. I’m not sure about that but we don’t have any more edge than we’ve ever had in calling the twists in turns of this one. What we would say is that looking, superimposing our views over the various moves in sterling, we do see the risks to sterling as symmetric. What that means is that we don’t necessarily see an opportunity in leaning one way or the othe. And sterling, remember, is the main barometer for what you would see in Brexit. Looking at other markets there’s just so much other influence that the UK economy is just not really a major player in those markets. So to be honest, our convictions remain stronger elsewhere. They remain stronger in emerging markets and developed world high yield credit; they remain stronger in the idea that you probably in your tactical portfolio want to own less government bonds than you usually do, that they continue to offer return free risk, or that area of the market continues to offer that return free risk rather than risk-free return.

Right. Thank you as always, Will, useful insights for the month. I look forward to catching up further at the back end of the year as we approach hopefully what is the end to those Brexit negotiations and the exit. With that, I thank also our listeners and our viewers for joining us today. If you would like to keep in touch with us between now and next month, please do seek out our regular weekly Word on the Street podcast where you’ll hear more of our views as they break on a week-to-week basis. With that, have a very good month.

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