Brexit talks appear to have hit the wall, as reflected in the decline in sterling. We still think a deal will be done but the risks of the alternative have risen. Businesses on both sides of the Channel (& the Irish Sea) face the huge challenge of the post- Brexit world – and this last-minute drama is not helping. Politicians need to act sensibly.
Where are we with the vaccines?
Brexit may dominate the headlines, but the world’s financial markets are more interested in the developments around the vaccine. With the UK rolling out its mass vaccination programme this week and the US expected to approve the Pfizer vaccine in the next few days and the Moderna vaccine next week, things are moving swiftly.
The need to store the Pfizer vaccine at -70 degrees Celsius poses big logistical challenges – people will have to come to get the vaccine in special centres rather than the other way round – but one way or another, the route to defeating the virus is clear. My personal guess is that take-up will be high, despite misgivings on the part of many. But much will depend on sequencing. Stories of limited side effects and relief at being protected, combined with tales of refuseniks getting ill, would boost take-up. By contrast, an example of people becoming seriously ill after getting the jab – even if unrelated to the vaccine – would have the opposite effect.
One big unknown is the degree to which the vaccine would reduce transmission. There will be some effect…we just don’t know how much. And then there’s the question of how long immunity will last. Will it be months or years? If further boosts are required, the second series of jabs can be different to the first for maximum benefit.
Meanwhile, we wait for the new trial of the Oxford vaccine to get underway following the bungled UK trial. Before those results are in, we do not expect it to gain approval from the various medical regulators, except possibly in the UK. The Oxford vaccine is important because it has the most ambitious production plan – over 3 billion doses planned for production on 2021 – is cheaper, and can be stored in a fridge.
Prospects for other vaccines are good too: the Johnson & Johnson variety is keenly anticipated as that requires a single dose.
How is the vaccine impacting market views?
From the perspective of financial markets, all that matters is that economic activity and corporate profitability can recover close to pre-Covid levels during next year.
And that gives a pro-risk bias. This is the time of year when New Year outlooks traditionally arrive on investors’ desk with a thud; this year investors are working from home and these outlooks are arriving electronically – absorbing memory space but causing no clutter in home offices. There is, as usual, a consensus amongst the analysts. Returns are likely to be modest but equities should outperform, the dollar will be weak and the rotation out of the US and into value should continue. Emerging markets are favoured for both bonds and equities.
We at BMO GAM do not deviate much from the consensus. We would note that the markets must navigate some tricky waters before the vaccine-induced recovery takes hold; the pandemic will get worse before it gets better. Growth may well be negative in Europe in the current quarter and the start of 2021. Meanwhile, the US faces serious economic weakness as we move into the new year – prospects of a fiscal deal by the lame duck Congress have risen, and we hope those are realised. The employment report shows that the US economy is already faltering. Ironically, amongst the major economies, only China has shrugged off the virus and is exhibiting vigorous growth. The country recovered to pre-Covid levels of economic activity back in the second quarter. These rest of the world will have to wait much longer.
So as the festive season approaches and investors get their portfolios into shape for the new year, we expect the risk-on rally to continue. Whatever 2021 brings, we hope that we can begin to put this year and the terrible effect pandemic that has dominated behind us.