Posted: 09 / 01 / 2021

At the end of an unprecedented year, after record global market falls in March, a recovery to June and then a steady fall off again to November in the FTSE 100 index, reality set in that this Pandemic will be here for a while.

At the beginning of November, with the US election “out of the way” and Coronavirus vaccine breakthroughs, markets responded by pricing in better times ahead. But the economy is a more sluggish beast, and it will take time to build up a head of steam and a strong rebound in the economy is clearly positive, but we should keep the champagne on ice for now.

A GDP seesaw…

The summer boom was turbo-charged by the Eat Out to Help Out scheme, while the furlough scheme worked its magic by keeping unemployment under wraps. But if you shut down an economy and then open it up, it’s not hugely surprising that you get a huge seesaw effect in quarterly GDP numbers. A swollen summer of economic activity hasn’t repaired the damage done in the first half of year though and the recent lockdown means the UK can expect to end 2020 significantly behind where it started. The Bank of England estimates an 11% contraction in the economy over the course of the year.

The real litmus test for the economy going forward is how soon it can return to pre-pandemic levels. Updates around vaccine rollouts make the climb back look a lot less daunting, not only because it offers the prospect of a brighter future, but also because it gives businesses and individuals greater confidence in the here and now. Businesses can see a glimmer of light at the end of the tunnel, rather than an interminable struggle to stay afloat, until we return to some semblance of the old normal at some unknown point in the future.

Things may get worse before they get better, however, following further lockdowns after New Year, rising unemployment on the cards over the course of the winter and of course Brexit news which could also give the economy an unhelpful shove back in the wrong direction.

Update provided by Sedulo Head of Wealth, Jon Fisher | Meet our Wealth Management team >

The introduction of a vaccine…

A vaccine provides some much-needed hope for the economy in 2021. But in the topsy turvy world of ultra-stimulative monetary and fiscal policy, good news can sometimes be bad news, because economic progress is offset by expectations that the props currently holding up the economy will gradually be kicked away. This has been reflected in the FTSE 100 index, which is still one of the worst performers this year, down some 15% from pre-COVID levels. However, it has responded very strongly to the news regarding vaccines and companies that have been really out of favour this year (oil, travel etc…) have rebounded very strongly. Interestingly, global funds holding “the winners” through this pandemic, companies like Netflix and Amazon fell off over the same period.

The effect of the US election…

US equities on the other hand have continued to rally since March and outperformed other major developed equity markets. With massive fiscal and monetary stimulus, fundamentals are looking stronger than other regions, even though high valuations remain a concern. With centrist Joe Biden winning the election, this is likely to “calm” markets however, the US still has high coronavirus infection rates, so their “third” wave is an obvious downside risk to monitor.

Other assets also continue to recover well; Private Equity suffered a dreadful third quarter, however these are back up to the June 2020 levels, Alternative investments have been steady throughout and bonds are benefiting from ultra-low interest rates.

A well-diversified portfolio is therefore important in order to counteract volatility and attempt to ‘smooth out’ returns.