Equities made further gains during December. Investors were caught in the crosscurrents of the discovery of a new, more transmissible, Covid-19 variant and the announcement of a Brexit trade deal.
Markets regained their poise as the UK and the EU finally agreed a trade deal. GBP and stocks exposed to the domestic economy rallied as the tail-risk of a no-deal Brexit was removed. The agreement is centred on traded goods and excludes the UK’s service sector. The performance of UK banks and life assurers was more muted as concerns grew over the future access of the UK’s hugely important financial services sector to European markets.
The conclusion of the Brexit deal highlights the significant constraints policymakers operate under. Despite bellicose rhetoric, politicians have a strong tendency to follow the path of least resistance. This is not to say that significant policy errors cannot occur, but that they happen less frequently than many a shrill commentary suggests.
In response to increasing case numbers many countries tightened Covid restrictions further. We continue to believe that markets will largely look through their short-term economic impact and focus on the potential for a significant recovery in the second half of the year. One of the biggest uncertainties as vaccines become available, and life begins to return to normal, will be the attitude of consumers and businesses towards savings and investment. The household savings rate has risen substantially during the pandemic and while this will come down the quantum and timing is unclear. Perhaps we are merely projecting our own biases, but we feel it is unlikely that households will dramatically increase their level of precautionary savings in a post-pandemic world. The recent significant rise in M&A activity certainly suggests corporates see little need to save for a rainy day.