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Client Update - 27th November 2020

Updated: Nov 30, 2020

We have had quite a bit of news to digest this week, ranging from a promising update from the Astra/Oxford vaccine team, news of what we can and cannot do over Christmas, a budget replacing “spending review”, ongoing Brexit stalemate and the announcement of the Governments plans for post lockdown Britain.

Boris Johnson has defended his decision to place 55 million people in England into the two highest tiers of Covid restrictions, arguing the country needs "simplicity and clarity". The PM said measures due to come in when lockdown ends on Wednesday 2nd December were more "relaxed" but would "drive" Covid down until a vaccine is available. There is concern that the Government is adopting a "one-size-fits all" approach, which does not reflect local levels of infection.

From next Wednesday, more than 32 million people are due to be living under tier two restrictions, banning indoor meetings between households. A further 23 million people would be placed under the highest - tier three - restrictions, which further limits contact between people outdoors. Just over 1% of England's population would enter the lowest - tier one - restrictions, under which the "rule of six" applies both indoors and outdoors.

Covid evidently remains at large throughout the lands and we are seeing an increase in cases here in the West Country. For our part, we continue to run a greatly reduced staff in our offices and continue to look after the majority of our clients remotely, via conference calls and the good old-fashioned telephone.

The Government has asked the regulator to assess the Oxford/AstraZeneca coronavirus vaccine, bringing the UK a step closer to a possible rollout. The referral to the Medicines and Healthcare products Regulatory Agency (MHRA) marked "a significant first step" in getting the vaccine "approved for deployment", the Government said. The UK Government has pre-ordered 100m doses of the Oxford vaccine. The Government's latest request to the MHRA comes a week after the regulator was asked to assess the Pfizer/BioNTech vaccine. The Department of Health and Social Care said the UK would be one of the first countries in the world to receive the vaccine, if it was authorised, with AstraZeneca set to have as many as 4 million doses ready for the UK by the end of the year and 40 million by the end of March 2021. The Government has also ordered 40 million doses of the Pfizer/BioNTech vaccine - which preliminary results showed stopped more than 90% of people developing Covid-19 symptoms.

Elsewhere, incumbent US President Donald Trump, has said he will leave the White House if Joe Biden is formally confirmed as the next US president. Answering reporters' questions for the first time since “losing” the 3rd November vote, Mr Trump insisted, however, that "this race is far from over". He evidently knows something we do not. Individual states are currently certifying their results, after Mr Biden was projected as the winner with an unassailable lead. The Democrat leads Mr Trump 306 votes to 232 under the electoral college system that is used to pick US presidents. The tally is far more than the 270 needed to win, and Mr Biden also leads the popular vote by more than six million. Electors will meet to formalise the result on 14th December, with Mr Biden due to be sworn in as president on 20th January.

The markets over the last few weeks have shown a desire to trade with cyclical hope but we might be back in a wait-and-see regime for a few weeks. Western economies are once again constrained by the only response we have at the moment to high levels of COVID-19 infections - lockdowns. Confidence in the recovery is just about hanging in there but away from the markets, society is suffering from the long-hard slog of the last ten months. Investors need to continue to believe, and with good reason, that policy is still there as a backstop to economic activity and that science and technology will deliver us a healthier and more efficient future.

The “cyclical hope” rally that was triggered by the US election “results” and announcements about the alleged efficacy of three of the COVID-19 vaccines currently in late-stage trials, has faded a little in recent sessions. The surge in value stocks and rise in US Treasury yields at the time of the announcement of the Pfizer Inc. vaccine was echoed when Moderna Inc., announced its own vaccine trial results. It is interesting that each week a new vaccine announcement is greeted by a more muted market response. We now want to hear how and when vaccinations will start.

Equity markets are still higher since the US election and value is still slightly ahead of growth. European equities, which are more cyclical, are ahead of the Nasdaq index. In the bond markets, credit has outperformed government bonds and there has been a particularly strong response from high yield and emerging market debt.

In the UK, Rishi Sunak set out this week the harsh truth of the impact of the COVID relief policy, with the Office for Budget Responsibility (OBR) projecting the UK economy will fall by 11.3% this year – a figure not seen since 1709, when the “Great Frost” devastated the economy.

The level of net public sector debt exceeded $2trn last month and stands at 100.8% of GDP, a level not seen since the 1960s. It is going to get higher. Yet, like in many other countries, the bond markets are relaxed. There are good reasons. One is that central banks continue to be large buyers of government bonds, and number two, debt service burdens are manageable at low interest rates. The interest paid on Government debt was actually lower in October this year than it was in October 2019. The interest paid by Governments on their debt levels reflects the decline in market interest rates and the reduced cost of funding that it allows. The benefits from supportive fiscal policies far outweigh the worries about deficits and debt levels, for now at least.

Dealing with debt in the long-term requires economic growth. In the face of the challenges of climate change, it is essential that some of that growth comes from investment in the energy transition and the mitigation of climate related risks and costs. To that end, the UK Government’s plans for green investment are welcome. However, they do not yet seem that ambitious compared to other countries. France, for example, has pledged at least double the UK amount and the EU’s recovery funds (despite Hungary and Poland stalling) will have a significant green investment element. Moreover, many of the initiatives outlined in the plan are already being pursued and invested in by the private sector – including the building of carbon capture facilities. Public money needs to sit alongside private investment – to help subsidise transition costs – but the estimates of what is needed are well above what the UK has pledged. There will be more focus on these plans as we get into 2021 as the UN COP26 meetings in Glasgow will be an opportunity to measure and compare updated national plans towards carbon reduction. As host, the UK should leverage its advantages and be seen to be taking a leadership position. The launch of a green gilt next year will be a good signal.

I am sure we are all sick and tired of lockdowns. Hopefully, the light at the end of the tunnel gets brighter in the weeks ahead. Hopefully, we can look forward to spending time with loved ones during the coming holiday season, although you will have to pick your favourites to meet the three-family rule. In the not too distant future, we can put 2020 behind us and look to a brighter and healthier world ahead.

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