Blog

By Joanne Benson, Portfolio Manager at Copia Capital Management

Key points:

• The global economy should continue to recover in 2021, supported by spending initiatives from governments and central banks.
• The Brexit deal between the UK and EU will present challenges for business, but a potentially more damaging no-deal outcome has been averted.
• Joe Biden’s election as US president will bring more stability to Washington’s management of domestic and foreign affairs.
• We are particularly mindful of the risks associated with Covid-19 vaccinations (global roll-out, mutations reducing effectiveness) and the ramifications of an uptick in global political tensions.

Coming into the autumn last year, countries in Europe and North America saw a rise in Covid-19 cases, prompting an increase in lockdown restrictions and casting doubt on the sustainability of the business recovery. Investor confidence deteriorated in October, but there was a sharp change in November with an abundance of good news: Three vaccines trials reported success, giving investors confidence that there would be light at the end of the tunnel. Additionally, Joe Biden’s success in the US election was viewed positively, which gave a further boost. On the back of this, equities performed strongly and while the big technology firms continued to do well, it was the businesses that suffered the most in 2020 (travel, leisure) that were among the strongest performers at the end of the year.

The Brexit deal announced on 24th December was welcome news for both the UK economy and UK listed businesses. While the deal maintains the quota and tariff-free arrangements that the UK had previously enjoyed with the continent, new customs arrangements will present businesses with additional challenges over the coming months. Nevertheless, it represents a better outcome than the no-deal scenario, which would have immediately impacted consumers with significant price rises. On a more positive note, away from its ‘divorce’ the EU and UK have been looking to new horizons and forging better connections with other trade partners. The EU has announced a new deal with China, which overtook the US to become the EU’s biggest trading partner last year. Meanwhile the UK has applied to join the Trans Pacific Partnership (CPTPP), a free trading bloc of 11 nations.

In the US, accusations of lies and cheating tainted the election from which the democrats emerged as the eventual winners. Despite President Biden’s experience in foreign policy, a focus on domestic matters will be his priority as, in addition to a health crisis, an extra 10 million Americans are out of work as a result of Covid-19. Biden’s response has been an ambitious ‘rescue’ plan to help citizens bridge the gap until businesses can reopen, but it will need to be scaled back if it’s to receive republican support.  A follow-up ‘recovery’ plan to boost the economy is due this spring. The US’s relationships with other nations have been bruised over the last four years, but we could be waiting much longer for a thawing in its relationship with China. China’s significance as a rival to the US is now widely accepted by the politicians of both parties, so while we expect greater stability in relations between Beijing and Washington, we are not expecting tariffs to be lifted in the near term.

In the current global?  environment and having witnessed a recovery in markets that has outpaced economic recovery, we do find some reasons for caution. A significant stalling in the roll-out of the Covid-19 vaccine, or a mutation that makes the vaccines ineffective, would deal economies a major blow. A further concern is an uptick in global political tensions. While we have not identified any material for direct exposure to either Russia or Myanmar – both are currently under the spotlight. We are conscious that political relations can be complex and, like tugging at a web, a combination of a few loose strands can have unexpected consequences. However, our analysis remains that with governments and central banks around the world providing exceptional levels of support, the outlook for 2021 is for a recovery that has room to run.