Weekly market recap: five things to watch in 2021

Amidst the ongoing Brexit and vaccine news, we look ahead to 2021.

FacebooktwitterlinkedinmailFacebooktwitterlinkedinmail   by Tertius Bonnin, 11th December 2020

What did Santa do when he went speed dating? He pulled a cracker!

Government bonds also pulled a cracker last week as a general risk-off sentiment hit the market. Asset class returns are below; it was a relatively quiet week last week with the exception of Brexit where traders begun to weight up whether the Sunday deadline was realistic for a Brexit deal.

Figure 1: Asset class total returns in base currency

Source: Bloomberg, EQ Investors

Rather than giving the usual update on what’s happened in the last week (I’m sure you will already have read your fair share of Brexit and vaccine news), I’m using this week’s piece to look forward to the next year and to cover off five things to watch in 2021. We’ll get the obvious two out of the way….

#1 Covid-19 Vaccine – Perhaps one of the most significant things to watch for markets will be the roll out of the Covid-19 vaccines. So far, we’ve seen the United Kingdom, Bahrain, Canada, Saudi Arabia and the United States all approve the Pfizer/BioNTech vaccine for which clinical trials have shown a c. 95% efficacy rate. But this vaccine is expensive, has transportation and storage issues due to its temperature requirements, and has used a new technology for its development which means some regulators are taking a cautious approach. As we said a few weeks ago, the AstraZeneca/Oxford vaccine has a larger potential impact for markets, particularly in the less developed world, given that it’s cheap, its manufacturing capacity is high, there are no strict temperature requirements for its transportation and storage, and that the technologies used for its development are tried and tested.

Figure 2: The AstraZeneca/Oxford University vaccine has rapidly become the vaccine of choice for emerging markets
Source: Launch and Scale Speedometer/Duke Global Health Innovation Centre, EQ Investors


#2 Brexit deadline (again) – Unfortunately, a vaccine can’t cure Brexit. I won’t touch on this too much as more than likely by the time this is published it will be out of date. Nevertheless, most commentators agree that even if compromise is found on fishing, a level playing field, and the general governance of the trade agreement, the new bilateral relationship will be significantly different from where it has been over recent years. But what of the economic impact? In more normal times, it may have been easier to assess the long-term impact of scenarios involving a no-deal or a comprehensive trade agreement, but as one major investment bank has commented, the economic impact of each of these is equivalent to the rounding error in the Covid-19 crisis. One thing is for certain: 31 December 2020 marks the end of the UK’s transition period, and thus a new chapter in UK-EU relations that will span far beyond trade.

Figure 3: the original timeline (indicated by the blue dotted line) allowed 21 months of transition period within which to negotiate a trade agreement. The revised timeline as per the renegotiated Withdrawal Agreement (indicated with by the pink line) has provisioned just 11 months.
Source: EQ Investors


#3 The incoming Biden administration – Putting an end to the biggest uncertainty factor that side of the Atlantic, the incoming Democrat is set to bring an end to American isolationism. President-elect Biden has already indicated his intention to work closely with global allies and to build a new global consensus around key policy issues. One such example of this is on climate change where we expect the new White House occupant to make good on an election pledge and to realign US policy with the Paris Agreement. A commitment to be net zero by 2050 will be another significant tailwind for clean technology companies as the US joins the European Union and China.

Figure 4: While the US has exited the Paris Climate Accord, the Biden Campaign committed the US to a 2050 target for net zero carbon emissions
Source: World Bank, European Commission, EQ Investors


#4 EU Recovery Fund – It’s set to be a bumpy road to a European recovery as fragmented national lockdowns and a slower route to vaccine approval weigh on the economic bloc. Yet market commentators have high expectations from the European Central Bank to stimulate as necessary and to keep interest rates low for the foreseeable future. In other words, monetary policy couldn’t be more supportive. But as we have observed in other economies, monetary stimulus (i.e. central banks) is only half the battle, governments also need to fire their fiscal bazookas. To this, we think the €1.8 trillion EU Recovery Fund (of which almost half is posed for green investment) poses a credible path not only to economic recovery, but to further European integration. Certainly an interesting one to watch.

Figure 5: The difference between Italian and German bond yields has been interpreted as a key indicator of risk in the Eurozone. The decline since March indicates a fall in risk as plans for an EU Recovery Fund have solidified
Source: Bloomberg, EQ Investors


#5 A new environment for technology – The incoming US administration will no doubt intensify Congressional scrutiny of US tech companies that are accused of monopolistic practices. Indeed, the US Federal Trade Commission’s Facebook suit is only the latest example of regulators and politicians moving their crosshairs over the industry. Evolving and complex business models make this a difficult legal fight for regulators; for example, how do you classify Facebook? Its social media platforms (including Instagram and WhatsApp) are free for its users and instead its profits are derived from advertising revenues. In this context, it would be hard to argue that Facebook has a monopolistic position in the advertising world. And yet, the company stands accused of anti-competitive practices in the way it has acquired social media platforms that have threatened Facebook’s position. Even in the wider global context, we see growing pressure in both Europe and the UK to more effectively regulate and tax these technology titans. Again, this will be an interesting one to watch.

See you in the new year.

STAT OF THE WEEK: 97% – the extent to which a trade deal between Britain and the EU is agreed, according to Ireland’s prime minister Micheál Martin.

Data correct as at: 11/12/2020

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Contact Tertius

    Tertius Bonnin

    Tertius joined EQ in 2016 and is responsible for covering global and thematic equity investment ideas. He also sits on both the fund selection and strategic asset allocation committees while also supporting the portfolio managers across a range of other responsibilities.

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