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.

 

Disclaimer: The information contained in this report is for illustrative purposes only and should not be construed as a solicitation nor offer, nor recommendation to acquire or dispose of any investment. Specifically, the share class used to create the illustrations may not be available on all platforms nor be suitable for individual investors. This report was produced by Collidr Research (“Collidr”) for Affinity Integrated Wealth Management (AIWM) and while AIWM and Collidr use reasonable efforts to obtain information from sources which they believe to be reliable, neither AIWM nor Collidr make any representation that the information or opinions contained in this report are accurate, reliable or complete. The information and opinions contained in this report are subject to change without notice. Model returns are calculated using the most appropriate share class of the underlying funds, having regard to the illustrative nature of the report, with all income being reinvested. As a result, real portfolio performance may vary from model performance. Where model portfolio histories are shorter than three years, historic model returns are substituted prior to inception date with returns from an Collidr performance benchmark. This benchmark is constructed from the average returns of all Collidr portfolios with similar risk profiles that existed during that time. The value of investments and the income from them can go down as well as up and past performance is not a guide to the future performance. Affinity Integrated Wealth Management is a trading style of Buryfield Grange Limited, Buryfield Grange Life Planning Limited and Affinity Integrated Wealth Management Ltd. ‘Buryfield Grange Limited’ is authorised and regulated by The Financial Conduct Authority. Not all services provided by Buryfield Grange are regulated by the Financial Conduct Authority. ‘Buryfield Grange Limited’ is registered in England and Wales at Inspire House, 20 Tonbridge Road, Maidstone, Kent, ME16 8RT. Company registration number 4568338. Collidr Research is a trading name of Collidr Technologies Limited, registered in England and Wales at 34 Southwark Bridge Road, London, SE1 9EU. Company registration number 09061794. Data Providers: Bloomberg L.P. and Collidr.

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