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Outlook for 2021 still unclear and dependent on the course of the virus

Following the previous month’s lacklustre performance, European equities began the final quarter of 2020 in a buoyant mood. With the promise of a Covid-19 vaccine on the horizon and a third quarter earnings season set to demonstrate a continuing corporate recovery, equities appeared well placed to benefit from the ample liquidity on offer from governments and central banks desperate to offset the worst impacts of the virus. But the optimistic mood did not last for long as the number of Covid-19 cases accelerated in many European countries and the threat of national lockdowns loomed once more. Restrictions were tightened in a host of nations including Germany, France and Italy, as well as Spain, where both a state of emergency and curfew were imposed.

The economic fall-out from these moves was plain for all to see particularly following the damage inflicted by similar lockdowns earlier in the year, a fact confirmed by the ECB who, at their month end conference, warned of the economic damage being done and all but committed to further supportive stimulus packages. Unfortunately, the US was unable to provide such comforting words with no agreement being made on their own fiscal stimulus package. With the presidential election looming it will now be down to the winning candidate to ensure these measures are in place. With Joe Biden topping the polls a “blue wave scenario” appeared to be edging closer, although the impact of Donald Trump’s brush with Covid-19 is difficult to gauge. In the UK Brexit negotiations appeared to falter, then restart, making this another event with a range of possible market moving outcomes.

Company earnings have been broadly positive in Europe, but the bar has been set low. For 2021 the outlook is still far from clear and will depend heavily on the course of the virus and any potential success with a vaccine. With the US elections out of the way and a likely resolution on Brexit there is cause for optimism as ample liquidity and support from governments and central banks should make equities the go to asset class when Covid-19 either runs its course or a vaccination is indeed found.