Market Commentary December 2020
Brexit Trade Agreement drives UK shares and Sterling higher
The announcement, on Christmas Eve, of a trade agreement between the UK and the EU, to come into force on 1st January, helped UK shares generally to end the year on a positive note. Most of the positive market reaction came in the days leading up to the announcement; the markets tapered off in the thin trading environment between Christmas and the New Year. Whilst the mid-cap and smaller companies indices rose by c.6.5% over the month, the FTSE 100 rose by only 3.1%. A strong rise in Sterling in the run-up to the trade deal announcement saw many of the FTSE 100 companies, which receive around two thirds of their revenues in foreign currencies, being marked down as the discounted cash flow valuations of their shares fell.
US sentiment improves following Biden victory
With the US election over, and a decisive result achieved, notwithstanding the objections of the incumbent president, the US market found its feet once again, and equities showed a strong gain once more in December. The technology sector, which had driven much of the rise in Q2 and Q3, but had fallen prey to profit-taking ahead of the election, moved ahead in December, with the NASDAQ 100 gaining 5.1%.
Asian equities and yen remain robust
Global investors continued to be net buyers of Asian and particularly Japanese stocks during December. Both the yen and the Japanese and other Asian stock markets were seen as a hedge against western economies where Covid-19 was seen clearly taking hold again. Asia as a whole has had a much more benign experience with the virus. Consumer electronics companies with commoditised online offerings were a particular feature. The Korean tech giant, Samsung, saw its shares rise by more than 20%, whilst Sony benefited from the launch of its new PS5 console, and Nintendo also saw strong sales and empty shelves over the holiday period. European markets welcome trade agreement, but Covid fears remain European stock markets mostly gained in December, though the rises were more muted than in the UK. Whilst the trade deal is seen to benefit both sides, the more pressing problem of the 2nd wave of Covid-19, and its variant strains was more prominent in investors’ minds. Widespread coverage in the media of Italian hospitals overrun by Covid-19, Germany entering another nationwide lockdown and France closing its borders to truck drivers without a negative Covid test certification all weighed on sentiment.
As is often the case, 2020 ended with a rally in most markets, as investors pondered their asset allocation for the New Year. With the uncertainty of the November US election behind them, and continuing positive news flow on the Covid-19 vaccines, equity markets rallied, as did the oil price, which was driven by the prospect of improving economic activity in 2021. US equities were once again one of the better places in the globe to be invested as technology stocks continued to make progress, with the tech-heavy NASDAQ 100 gaining more than 5% over the month.
European markets were driven, once again in December, by Covid-19 news, and, to a lesser extent, the news flow from the Brexit Trade Agreement negotiations. Having seen the rise in non-compliance with Covid-19 rules since the announcement of the vaccines in November, and the rise in cases in the US following Thanksgiving, the short-term outlook for the European economies looked uncertain, but the late announcement of a trade agreement helped markets to retain their gains on the month.
The pound saw a strong run in mid-December, in anticipation of a Brexit Trade agreement. Throughout the past four and a half years, Sterling has been the barometer of sentiment regarding the UK leaving the EU, and there was a visible sigh of relief in the currency and markets as an agreement came to appear more likely, following growing pessimism in previous months. The pound gained against other major currencies, just as the dollar continued to be driven lower by continuing monetary and fiscal stimulus measures in the US.
The US was alone among the major government bond markets in seeing yields rise during December, as improving economic confidence following Joe Biden’s election victory led to a modest sell-off in treasuries. Most other bond markets were flat or saw a small contraction in yields, but returns for UK investors in overseas bonds were negative due to the effect of stronger Sterling. High yield bonds performed best, driven by investors struggling to find sources of income.
*A Generic bond is a theoretical bond that always has the specified tenor, unlike a Benchmark bond, which is a physical bond, with a decreasing tenor.
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