News from the frontline – 20 November 2020

When we started this year there was a fair amount of optimism, then COVID-19 fundamentally changed so many things and accelerated transformations that in many cases were already in play.

As we entered a second lockdown in England, there was a sense of positivity within our ranks. Although I had resigned myself to a Trump win in the US election, my hope was that Biden would prevail. I have no political view and I know there will be many disappointed people, but it was more that personally I, like many, found Trump deeply uncomfortable as a leader.

The markets had priced in a Biden victory, but then towards the end of October they started to panic at the thought of a ‘blue wave’. However, it seems likely the Democrats will not take control of the Senate which means some of the more radical policies are unlikely to go through and this has been met with relief within markets.

As we watched markets rally to reflect the US election, news came through on 9 November that Pfizer and BioNTech had developed an effective vaccine with a 90% success rate (even higher for those over 65). This week, Moderna announced that their vaccine shows nearly 95% protection. There is also news coming from Oxford, which is easier to transport and distribute. It is worth remembering that the flu vaccine prevents only 40%-45% of people from getting it.

The potential remains for at least one or two more vaccines in 2020, which could see key NHS staff vaccinated first. It is important to stress the vaccine (and others which will follow) must be approved, and then put into worldwide distribution which could be as complicated as lockdown itself. That said, it brings hope as we see out the year.

We are also hoping the positive news continues via confirmation of a BREXIT deal. Interestingly, more people are optimistic, because they feel neither the UK nor Europe want a no-deal in the current economic environment. We wait to see what happens in the coming days and weeks. The sticking points remain around fishing and sovereignty, but it now seems next week is the crucial time. Particularly of interest are the thoughts from Mirabaud on Brexit.

One of the most fascinating discussions in our recent meetings was with Brian Wesbury of First Trust. I would recommend reviewing his sometimes unconventional thoughts, and he often challenges our thinking.

First Trust – the antidote to conventional wisdom – Brian Wesbury

COVID-19

• There are two camps of people both in the US and Europe; those that are trying to live normally, and it is those people who are keeping economies going, and then those who are scared to do anything
• COVID is real, but it must be put into context. In the US there is a spike in fatalities, but these are at the same level of general fatalities in the 1930’s and 1940’s in the US. Medicine over the decades is far more advanced. He feels that economies have overreacted because you know where the risk lies
• The data is problematical in the US; the tests are highly sensitive and people coming to hospital for heart attacks, hip replacements etc if tested positive are counted as COVID cases although the original cause of hospital admission is something different
• Treatment is getting better and the deadliness of the virus is reducing. This is the worst virus we have seen for the last 20 to 30 years but not compared to what we have been used to in the past (Spanish flue etc)

Economies

• Brian feels that the approach to lockdown is wrong. You cannot lockdown and stimulate forever, because how do you pay for it all? What you should be doing is locking down debt for 100 years on the low rates that are available. What countries like the US and UK are talking about are raising taxes, which slows economies and growth, and then leads you into a death spiral
• Investing moving forward needs to avoid those economies which are raising taxes to pay down debt because it will not end well
• In the short term, he believes the S&P500 on current metrics is undervalued and will hit new highs in 2021. They believe tech will hold onto gains, but growth will slow as others catch up
• In the US 6.4 million are out of work but there are 6.4 million job openings, these job openings will not work for everyone but there are opportunities
• The world worked to bring China out of poverty, and trade deals reflected this. China is now a wealthy country and should not enjoy the same advantages which lifted it out of poverty. Expect supply chains to move away from China, and a more domestic growth story moving forward
• We should not see everything as negative. Newton’s critical insights to calculus came in the years of the great plague. He described the period as “the prime of my age for invention and minded mathematics and [natural] philosophy more than at any time since.” The internet was developed to help us communicate during a nuclear war, during this time Tesla has been developing a satellite network for the whole word and this could transform poorer nations. Companies like Zoom have seen 7 years’ growth in 7 months. Perspective is key as it depends on how you look at things

Election

• No political view from First Trust; but fraud has existed in the US voting system in the past especially in the Chicago area and a few local elections across the US have been overturned on the back of this. However, is the level of fraud seen, enough to change things? Brian does not believe so
• The election tells us one thing – the US population wants peace and quiet. It does not matter which side of the political fence you sit on; people do not want to remain angry, but neither do they want big change. So, a divided government is good overall which is why markets have re-acted so positively
• We should expect a stimulus bill, but it will not be big, there might be an infrastructure bill and some changes to taxes but not much else
• Things at least for the next two years will be fairly unchanged

Carmignac

We were recently researching the Carmignac Emerging Markets Fund, and they identified four long term trends for Asia and China:

• Digitalisation and innovation: the race for technological independence and industrial upgrade
• Consumption upgrade: China is on its way to becoming one of the largest consumer markets
• Green developments: the race for electric vehicles and clean energies
• Healthcare: innovate to meet the needs of an ageing population

Drivers for change include:

• Tech revolution, accelerated by Covid, is happening in EM Asia, creating a shift of economic power towards the East (with China, Korea Taiwan leading it)
• US-China Tech War is reinforcing this long-term powerful trend as it is forcing Asian tech companies to accelerate investments in new technologies to gain their autonomy & extend their leadership.

Key short/mid-term/long-term catalysts:

• Better management of Covid
• Economic activity rebounding in EM Asia / China despite less sizeable stimulus packages vs DM / US struggling to get their economy back on track despite very loose fiscal & monetary stimulus
• USD depreciation: This widening gap between monetary /fiscal policies and growth rate differential between US on one side and China / Asian countries on another side is calling for USD depreciation, creating a good backdrop for EM & Chinese assets
• Strong reform continuity under the leadership of the Communist Party, versus most of European countries and US (illustrated by the fact that most of the Goals of the PRCC* 5-Year plan have been achieved), providing investors good visibility on the government’s economic & financial policy focus over the next years.
• Asian Free Trade Agreement with China at the centre. The 15 member countries account for 30% of the world’s population and GDP, making it the largest trade bloc, aiming to stimulate Asian economies amid the pandemic

First Trust – 2020 US Presidential Election Results

Thoughts on the election, and what it means:

• Biden will become the 46^th President on 20^th January but Republicans will likely control the Senate (60% chance they will take the two seats being contested)
• Democrats majority in the House declined and Republicans likely to take the House in 2022, but the Democrats could take the Senate in 2022 because the Republicans are defending more seats
• Expect policy stability – no significant tax hikes for two years at least, unlikely to have trade wars, smaller stimulus especially with the vaccine news – all of this will be good for equities
• Focus on Treasury Secretary – likely candidates are Lael Brainard or Roger Ferguson, both are moderates and good for equities
• Biden is against Brexit and will be tougher for the UK to get a trade deal, likely to focus on the EU first, and then the UK
• Biden likely to be a President akin to Reagan where he appoints people he trusts and likes to make decisions, so he will be less likely to be involved in day to day decision making. He is likely to be more of a consolidatory figure and he has good personal relations with many from the Republican party
• Big tech like Apple, Google and Amazon are likely to be left relatively unharmed – more likely to see that come from any future Republican government
• Believe that the US relationship with China will be better under Biden
• Do not believe Trump will face any federal charges, he might be fined and unlikely to go to prison. In terms of running in 2024 there are at least 20 names of which 10 could run, Trump Senior and Junior are in that mix
• Believe interest rates will not rise until 2025 or beyond

Mirabaud – UK Equity Team

Thoughts on Brexit:

• Will be concluded one way or another in the coming weeks
• They hope common sense will prevail and that a deal will be found
• For many businesses, a deal or no deal will not be that material, they will adapt and the mispricing in the UK market will reverse  
• They feel a no deal is far worse for Europe than UK (fungibility (exchange and trade process) and financial plumbing)
• No car sales to the UK is a problem for the EU
• No pharmaceutical sales to the EU are a problem for the EU
• No financial services sales to the EU is a problem for the EU

JPM Morgan – discussion with Dr Gertjan Vlieghe (voting member of the Bank of England’s MPC)

• Without a vaccine it is very hard to see how the economy fully recovers, therefore the announcements are important
• The base case is that the worry about the virus will go away, and they expect the UK economy to return to pre-Covid levels before the end of 2021
• However, they believe it will be harder for people to get jobs and therefore a return to lower unemployment will take longer
• ‘Lower for longer’ for interest rates, because of demographics (more people in retirement, fewer people working, big increase in savers etc). If we look at Japan, they are 15-years ahead of us and this shows where we are going with interest rates
• Even pre-Covid the BoE felt interest rates were high at 0.75%, and in the US, they were in the process of cutting rates
• We should not fear negative nominal interest rates, they have worked in Europe and Japan, and the fears many had have not materialised. There is no evidence this would change if implemented in the UK. However, it is not a straightforward yes or no, it depends on many factors including whether it would be effective and appropriate
• The team does not believe that inflation is a worry, perhaps there will be short spikes if a no deal Brexit happens and tariffs come into play, but expect it to take at least three years to get close to the target level. Only sustained inflation would drive any policy change and not short-term movement

T Rowe – Election Special

• The election is not technically over but it appears we will have a continuation of a divided Government with the Senate under the Republicans and the House with the Democrats
• Eyes will fall on the two seats in Georgia which could provide a 50/50 split in the Senate
• Biggest turn out for 50 years and the markets seem to be happy with the result but expect volatility especially if the contested election continues, and there may be some validity to Trump’s assertions
• They expect fiscal packages to be much smaller than the Democrats wanted – the concern is the increase in the virus, and whether this drags the US into a double dip recession
• Any significant changes to taxation are unlikely with a divided government but expect some rolling back on regulations that were removed by Trump. Tech is unlikely to be in the firing line in the short term, because although there are issues there is little agreement on the solutions
• Expect a more multi-lateral approach especially with countries / regions like the European Union, Japan, Korea, and Canada
• They do not see tariffs with China being reversed without some return from China, but they do think the negative rhetoric will slow
• What takes the markets higher from this point is not whether Trump or Biden are in office but things like COVID, the recovery in the economy and geo-politics
• They feel the world should be in better place in the next 6 to 9 months, but there will be short-term volatility

Investec Market Update

• COVID/Vaccine, US Election and Brexit – if all resolved then it could change the nature and shape of the markets moving forward and we have 2 out of 3 already!
• For many, investments are up from the 1 January. The main negatives are the UK, REITS and oil
• The make up of the UK Stock market is very different to the US and heavily weighted to sectors out of favour
• The chances of negative returns on the S&P500 diminish over time. From 1929 to present day there is a 6% change of negative returns over 10 years, daily this is 46%. The message is to focus on long term rather than short term movements
• They believe we have a ‘swoosh’ recovery where we have seen a strong recovery, and this is now tailing off as more lockdowns kick in. We should expect a bumpy ride in the short term
• The UK, France and Spain have been the most impacted in terms of fatalities and hit to GDP. On the other side those economies less impacted are China, Korea, Indonesia, and Australia

JP Morgan Market – Long Term Capital Market Assumptions -2021

JP Morgan have launched their long-term capital market assumptions. To read click here

A few snippets to consider:

• We are entering a new cycle where fiscal and monetary policies are working together and this is very different to the cycle we are coming out of
• We are stepping into the unknown and this cycle will likely be very different to anything we have seen before
• The US is coming into this cycle pretty much fully valued, whereas Europe and UK are not and offer the potential for higher returns over the next decade
• Technology has driven the US market. Technology will drive the next decade, but it may change, and the focus could be on areas like renewables and green energy and this could benefit areas like Europe and Japan who are in a much better position
• Climate change is likely to reshape mega trends – natural disasters have a massive impact and cannot be ignored. Governments are investing in change – European Green Deal, UK Green Plan and Biden’s Green plans, this will only grow
• The move to a low carbon economy will hit sectors and countries and this will produce opportunities and risks

BMO – Chief Economist

• Solution we have been waiting for has arrived, and the world can start to get back to normal
• Although we do not know how long the vaccines last and how they work on the elderly, the 90% to 95% protection is way above even the most optimistic expectations
• There is significant confidence that other vaccines will have similar success, and that they can be mass produced and will be available to hundreds of millions of people by the Spring
• They believe the rally we are seeing has further to run, with the laggards (especially in the travel and leisure sectors) doing well. They also believe value stocks should do better than growth stocks during this rally 

Invesco – Economic Update

Reasons to be positive:

• Very different to Global Financial Crisis, both consumers and businesses are holding higher than normal cash balances
• Once consumers feel confident (i.e. with a vaccine) then these large cash balances will be spent which will help asset prices
• An increase in spending on consumption could be good for employment and increased company investment spending
• Risks are where the recovery comes too quickly, and inflation could rise faster than expected but do not expect inflation to rise until 2022 or 2023

US:

• Expect a move away from isolationism towards globalisation under Biden
• Biden is more multi-lateral, and this will be good for Europe
• It is difficult how Biden will treat China especially as China trades with over 127 countries including Australia, Japan, Korea and Germany and these economies are unlikely to give up that trade to support the US
• Expect Biden to rescind executive orders, and therefore will see US re-joining WHO and Paris Climate Change
• Big ticket items will not happen like expansion on Obama Care, tax changes etc

Vaccine:

• They worry that we see the vaccine as ‘job done’; the danger is that we assume it allows us to get back to normal and ignore the wider impacts of COVID
• If we recreate the same model, then we will run into trouble very quickly but believe there is greater focus now on ESG and the social aspect
• Walmart as an example scrapped plans to let robots check inventory in stores, as they found it was simpler to let humans do the job
• Should not ignore underlying changes to our lives and the world around us – some of these changes include digitisation, inequality, acceleration of China and the next iteration of the EU 
• The vaccines show the potential of synergy between big and small companies that unlock the opportunities, like BioNTech which is a husband and wife team linking with Pfizer
• Likely to have two other vaccines this year but there are many challenges – how effective are the vaccines when they are rolled out, who gets vaccinated etc

Markets:

• Expect, even with a vaccine, a long hard winter especially for those economies in a second wave but China will continue to see a rapid recovery
• Consumer confidence remains weak especially in the UK where only 17% are optimistic of a recovery in the near term. Growth in the UK is losing momentum, and hence more QE and extension of schemes like furlough
• No deal Brexit will hit UK growth by between 1.4 and 1.6, even a deal will damage growth by around 0.6 next year
• News from Pfizer saw value stocks significantly outperform growth stocks and we might be seeing a rotation, but it will be far from easy
• The UK market is cheap and around a 46% discount to global equities, but the UK is very challenged around sector mix, weak currency, weak growth, Brexit etc
• From a market perspective the US election result if it stays as expected is a goldilocks scenario and is therefore broadly welcomed because the Democrats will be unable to enact some of their more radical policies

Hermes – Asia Team

Vaccine:

• This is not like the flu, as older people are more likely to die if they catch it compared to the flu
• Vaccinating the older generation, and high risk, is the correct move as it gives confidence to younger people to go out as they know that that they are unlikely to infect older and high-risk people
• Rally likely to switch from high priced companies, to lower value companies which have been ignored by the market

China antimonopoly rules:

• Chinese government worried about undesirable practices, and restrictions on competition
• Halting the Ant IPO was a warning as are the antimonopoly rules that companies need to serve a higher purpose i.e. society not just profits
• However, there is a balancing act, and it is likely they will not go too hard against large tech in China

Interesting articles

Bid Ideas Report by Art Invest 2020 – click here

Trump’s attacks on vote counts seem to follow an authoritarian playbook – click here

A vote for peace and quiet – click here

Trumpism is here to stay – click here

Dozens of COVID-19 vaccines are in development. Here are the ones to follow – click here

The time to push ahead on tackling climate change – speech by Andrew Bailey – click here

Meet the contenders for Biden’s Cabinet – click here

Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog, and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.