The Brexit game of deal or no deal continues – we’ll give you the definitive answer on how it will all end. We’ll also discuss important questions of UK interest rates and explain why National Savings have in effect made an easing of monetary policy that is more important than anything the Bank of England will announce when it meets this week. And as the US rolls out it’s mass vaccination programme, we consider this question: if all the good news on the vaccines has been announced, is there any more room for upside in equities?
But first, Brexit
Deadline after deadline has passed and we’re still talking. In order to pass this deal, the Europeans have decided that they won’t translate it into the multiple languages of the EU27. That doesn’t really matter as everyone speaks English anyway, but it does show that Europe wants a deal. Yes, it’s not top of the agenda, but they don’t want multiple pressure groups from French fisherman to German carmakers blaming their politicians for refusing to do a deal. And Boris Johnson has convinced Europe that he is at least willing to risk a no deal.
All that is good news. The odds still favour a deal. But the answer to the question of when Brexit negotiations will be concluded is easy: they will never be concluded! The post-Brexit world will be endless discussions about arcane issues such as cabotage, the five freedoms and rules of origin. Arcane but very important to businesses on both sides of the channel – and the Irish sea.
If we get a deal, many cans will have been kicked down the road. And for all the talk about access to the single market, the reality is that we won’t have access to the single market on current terms. We won’t have the unrestricted access that we currently enjoy. We’ll be a third country subject to all the non- tariff barriers that other third countries face. Not a disaster by any means, but still worse than the current situation. But a Free Trade agreement is something that has to be agreed this month. If it is, then all that is needed for EU ratification is agreement by the European Council and the European Parliament. If we miss that deadline, any trade agreement would have to go through national governments – and that is a slow and uncertain process.
More important than the deal itself is that the post-Brexit relationship avoids the acrimony and finger pointing that would follow the breakdown of talks.
We shall see.
Any more room for upside in equities?
Let’s move beyond the parochial concerns of Brexit and ask the bigger question about the prospects for risk assets at the global level. We’ve already had a big rally in equities hurt by the virus since the good news on the vaccines was released. Since late September, IAG, which includes British Airways, is up 60%, and Carnival Cruise Line is up 53.5%.
So, is all the good news priced in? We think not.
Deutsche Bank do a regular survey of international investors and the latest one asks them to highlight their biggest fears for 2021. The top 3 all relate to risks of a setback to vaccines, and we think they are all overstated. The number one risk is a fear that the virus mutates and defeats vaccines…yet the experts in this field point out that it has not mutated significantly so far and that the technology that gave us these revolutionary vaccines would allow us to tweak them if it did. Indeed, hopes are high that the huge research effort that produced a vaccine will allow us to find a vaccine for that master of mutation – the common cold. The second fear is that side effects emerge. Yes, that’s a risk, but side effects are usually evident within three months of vaccination, so reasonably common side effects should have been evident already from the trial. Moreover, side effects with vaccines are typically treatable, and different vaccines may well have different side effects so can be tailored. Remember there are many other vaccines in advanced trials. There is also the risk that people will refuse to take the vaccine. We’ll see, but early results are favourably: very few of those contacted in the UK have said ‘no thanks’…indeed, the reverse is the case.
Finally, and most important of all, those virus-hurt companies may have enjoyed a big rally, but there’s a long way yet to go. The share prices of Carnival and IAG could double from current price and still be short of their pre-Covid levels.
Not all plain sailing from here
The virus is still on the rampage in many countries, lockdowns are being tightened and the upcoming holidays will fuel a further rise. Negative growth is a real prospect in Europe and the US. Central banks have already started easing further. There’s more to come. And as for the Bank of England, they will probably move base rates to zero in January – and negative if there’s no deal – but the decision by National Savings to cut their main interest rate from a market-beating 1% to just 0.15% will lead to lower mortgage rates and further fuel a buoyant UK housing market.
This will be a Christmas like no other and the new year will start with tough restrictions and renewed recession. But in my opinion, we are beginning the process that will end the war against the virus, and that victory will be positive for risk assets and life in general. And on that optimistic note, I wish you well until next week!