Weekly review: Vaccines and Budgets to drive markets

Macro Update 18 January 2021
January 2021
Steven Bell

Steven Bell

Managing Director, Portfolio Manager & Chief Economist, Multi Asset Solutions


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Risk Disclaimer

Past performance is not a guide to future performance. The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

Key takeaways

This week I’ll focus on how the vaccine roll-out and budget decisions will determine how the economy here and across the globe will fare, and what this means for corporate profits and equities.

The world’s media will be focused this week on Joe Biden’s inauguration in a Washington blighted by a militarised ‘green zone’ reminiscent of a war torn city. This may be ‘famous last words’ but I think US vaccines and budgets will be much more important drivers of financial markets. Incoming President Biden has announced a bumper fiscal package of close to two trillion dollars. Coming on top of the one trillion dollars package agreed by Trump, that would be huge. Just in case you have become inured to these big numbers, this would amount to some 15% of GDP and as it most of would come in the next month or two, that would boost incomes massively. And much of the previous fiscal packages were saved by US consumers, so there is the potential for a massive splurge of spending in the US, even if – as is likely – the package that is eventually passed is significantly smaller than the initially proposed 2 trillion.

But it’s important to note the use of the word potential – because the US is suffering massive limitations on the ability to spend money. Some mandated by government but also voluntary decision by citizens frightened by the pandemic. We in the UK, suffering one of the worst second waves in the world, can understand this.

Successful vaccine roll-out needed for a US spending boom

And the timing of turning this potential into actual spending depends on the vaccine roll-out. In the US it’s so far so good. Over 12 million doses delivered to over 10 million people, 4% of the population. This suggests that there’ll be a real boom from the spring onwards as restrictions are relaxed and consumers feel more comfortable about exploiting the freedoms they already have. Goldman Sachs have just whacked up their forecast, as of last Friday, to 10% annualised growth in Q2 followed by buoyant growth for the rest of the year. Corporate earnings would also be strong, with S&P earnings per share this year beating pre-Covid levels. That’s an amazing result.

It’ll be a similar story in the UK. Our vaccine roll-out is going even better than the US. But the Kent variant means we’re suffering even more from the virus. Pressures on the NHS are the key to government decisions on the lockdown. Right now, and through February, the pressures are set to increase. Things will get worse before they get better. But it should all change in March. Reopening of non essential shops shortly before Easter, pubs and leisure a few weeks after, is a realistic timetable. Restrictions will remain on numbers etc. but we should see the beginnings of a return to normality from spring-time onwards.

UK Budget: reform, not radical

Of course, there are many risks here. Further mutations, the issue of elderly people dying shortly after receiving their jabs in Norway, to name just two, but the other big issue here in the UK relates to the Budget in March. Rishi Sunak is known to be a fiscal conservative and fears of tax rises – capital gains tax, corporate tax, wealth, property – have all been mentioned. We think he’ll do nothing radical on this front. But he does have to decide on the Stamp Duty holiday, due to expire in March. The last two Chancellors who allowed a Stamp Duty holiday to expire suddenly came to regret it and were forced to reintroduce measures to help the housing market. I think he’ll take the opportunity to reform the system, reinstate the lower rates for first time buyers and phase in the end of the holiday. Also high on the agenda will be lots of talk about a renewed post-Brexit, post-Covid Britain with green energy, levelling up and a manufacturing renaissance all featuring prominently.

So, while there may be announcements of tax hikes and spending cuts in the future, I do expect a fiscal squeeze to take effect this year. We need to see the recovery first.

Not optimistic about Europe in the short term

Meanwhile, over in Europe, the vaccine roll-out is still going oh-so-slowly. Quite extraordinary. And VAT is set to go back up in Germany.  The economy in Europe, along with the UK, has suffered more from the pandemic than the US. They should therefore have more to catch up. But I’m not optimistic about Europe in the short term.

All in all, this represents a good background for risk assets. But I wouldn’t expect stellar returns. Positioning is stretched and a great deal of optimism is already priced in. But economic recovery and near-zero yields on bonds all suggest that equities are set to outperform.

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