Stock Take

Global markets are on track for their best month ever, after the announcement of several vaccines to fight COVID-19 and the election of Joe Biden shifted market sentiment to ‘risk-on.’ The US Dow Jones hit a record high last week and the MSCI World index of developed and emerging markets also surged.

“The range of potential outcomes of COVID-19 has reduced dramatically and that is very significant for the market,” noted Johanna Kyrklund from Schroders, manager of the St. James’s Place Managed Growth fund.

Fund managers think that market optimism will continue into the New Year and beyond as major economies slowly return to growth.

“I have always been amused by the advice to never forecast anything, let alone the future,” said Chris Iggo from AXA Investment Managers. “However, today I feel pretty confident that portfolios should be positioned for continued good performance from equity markets as we head into 2021.”

Markets responded well to Biden’s appointment of Janet Yellen as US Treasury secretary last week, and Donald Trump finally admitted that he would leave the White House if the Electoral College voted him out, reassuring politicians and investors that there will be a peaceful transition of power in January.

The period between now and Christmas may further encourage a positive start for markets next year.

“We are hoping that the news events in the next few weeks – comprising European Central Bank easing, a dovish Federal Reserve, the start of vaccine deployment and an easing of European lockdown restrictions – may all be slightly risk-supportive,” suggested BlueBay Asset Management, co-manager of the St. James’s Place Strategic Income fund.

But there are several reasons why investors should adopt a sense of ‘cautious optimism’ about the months ahead.

“The fact that there’s going to be some practical challenges to rolling out the vaccine means we still need stimulus to be in place and that is the critical risk as we move into 2021 – that governments remain committed to supporting people,” argued Kyrklund.

The UK government delivered a Spending Review last week that highlighted the economic damage COVID-19 has inflicted on the economy and the public finances. While committing to support the country in 2021, Chancellor Rishi Sunak also emphasised the need to manage the budget deficit in the years to come following forecasts from the Office for Budget Responsibility that showed a long road to recovery lies ahead.

But fiscal consolidation must be approached carefully and managed alongside other risks, warned Capital Economics. “A no-deal Brexit would set back the economic recovery and an “uncooperative” no-deal could have lasting implications,” they suggested. But “as long as politicians don’t mess it up, we believe the economic outlook from mid-2021 is better than most think.”

Although we have entered the ‘pre-vaccine’ period, we cannot claim yet that we are in a ‘post-lockdown’ state. A revised tier system of lockdown measures in England announced last week brought renewed immediacy to the challenges faced by companies and households over the Christmas period.

The annual shopping event ‘Black Friday’ was somewhat overshadowed by the news that Arcadia, which owns well-known high-street brands including Topshop and Dorothy Perkins, was on the verge of going into administration.

Its collapse shows the scale of the challenges faced by high-street retail, as COVID-19 has wiped out demand and dramatically accelerated the shift to online shopping.

The hospitality industry, which cannot rely on lifeline events like ‘Black Friday’ to boost pre-Christmas sales, is also expected to struggle through December. While it is likely to be bars and pubs that suffer most in Britain, ski resorts across Europe are about to enter another season with COVID-19 restrictions in place.

Some European leaders want a blanket closure of resorts to prevent a rise in coronavirus cases, while others argue that closing them at this time of the year would be catastrophic for regional economies in the Alpines, which rely on the ski sector for revenue.

It can be difficult to relate to the optimism that is visible in global markets when the festive period is approaching and COVID-19 restrictions are still in place. But vaccine developments are still underway, reminding us that the light at the end of the tunnel is still shining.

“We need to remember that it’s easy to get quite gloomy sat here in the UK as we lurch from tier to tier and lockdown to lockdown,” noted Johanna Kyrkland. “But actually, the picture in Asia is very different. China has come out of this very well … so in some senses there are parts of the world that are already firmly on the road to recovery, and I think that’s the ultimate direction for us as well.”

Wealth Check

Plans for future tax rises were conspicuously absent from the chancellor’s Spending Review statement last week. But it is only a matter of when, not whether, taxes begin to increase. The Institute for Fiscal Studies estimates the government needs to find £40 billion a year in spending cuts and tax rises by the middle of the decade to restore balance to the nation’s finances.

The spring Budget is likely to see the first of these announcements, adding extra impetus to using available tax reliefs and allowances before the end of the tax year. Increases to Capital Gains Tax remain a focus of speculation, underlining the importance of making appropriate use of pension and ISA wrappers to shelter funds from any further tax on gains.

Another consequence of the pandemic has been a surge in cash savings in personal bank accounts to £1,925.2 billion, up £200 billion from this time last year.1 Will the run-up to the end of the tax year see savers use their ISA allowance to park cash, or to invest for the longer term in assets with the potential to generate tax-free capital gains?

At the current average easy access rate of 0.22%,2 a basic-rate taxpayer can get all their interest tax-free on cash savings of up to £454,000 held in a standard account. It’s a staggering figure, and an academic one for most of us, but it does highlight whether your valuable ISA allowance should be a home for your cash this year.

Of course, when interest rates rise that figure will reduce, whereas all interest from a Cash ISA will always be tax-free. But as things stand, a substantial rise in interest rates feels a long way off.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.

An investment in equities (funds) does not provide the security of capital associated with a Cash ISA or a deposit account with a bank or building society.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

1Bank of England, October 2020
2Moneyfacts, November 2020

In The Picture

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The Last Word

“Poverty is bad, it’s difficult, I knew it well. You want lots of things and all you can do is dream about them. It would be nice if there were more justice – if those who have a lot had a little less, and those who have a little had a little more.”

World renowned Argentinian footballer Diego Maradona, who passed away last week

AXA, BlueBay and Schroders are fund managers for St. James’s Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past resultsare indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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