If we look back on a busy year, we see a few key themes that underpin most of the biggest news – healthcare, international politics and the economy. Covering Covid-19, the impact of lockdown on the economy and the culmination of years of Brexit discussion, these broad themes have seldom been more all-encompassing.
As we look ahead to what will hopefully be a more optimistic and considerably less dramatic 2021, we’re left looking at the same key areas. From healthcare to Brexit, the future of the UK is dependent on the same connected factors that influenced 2020, each with the potential to affect not only returns for UK investors but lives and businesses across the country.
So, let’s take a look at each of them and understand how they might impact investor returns going forward, as well as diving into some of the broader societal and economic trends that 2020 only served to accelerate.
Healthcare in the spotlight
The first key consideration as we look to 2021 will be healthcare, which will still be very much front and centre. If you were to ask investors what they fear the most for the year to come, the majority would likely talk about the efficacy of vaccines – whether the virus could potentially mutate or whether the rollout is in any way hindered.
As it stands, the UK has been forced to enter its strictest lockdown since March, meaning that people have been ordered to stay home where possible and all non-essential businesses have been made to close. With UK daily case numbers exceeding 60,000, the full national lockdown is the last weapon in Boris Johnson’s (arguably) neglected arsenal to combat the spread of the virus.
The eyes of the world will be on vaccine distribution. If governments can smoothly, efficiently roll out millions of vaccines to mitigate the overwhelming impact of Covid-19, economies can begin to reopen. The approval of both the Pfizer-BioNTech and Oxford vaccines gave the markets a boost, with the focus now on logistics as the nationwide operation gets up and running.
Ultimately, it’s a question of normalisation. We have to consider how quickly life across the world might normalise and healthcare is, naturally, a critical part of that process. The UK government has earmarked Easter as a deadline of sorts for serious progress to have been made – how achievable that is remains to be seen.
Economic recovery post-Covid
The second consideration is one of economic recovery. Where 2020 was dominated by economic turmoil, with governments struggling to keep the ship afloat in many cases, it doesn’t seem unreasonably optimistic to hope that 2021 will be a more positive year economically.
It’s worth noting that, prior to the pandemic, not all economies were performing extremely well. In this sense, the success of Covid-19 vaccines is unlikely to be a silver bullet to ailing economies the world over. There are pre-existing concerns about areas like growth and unemployment – particularly in western Europe – which have only been exacerbated by the global pandemic.
However financial markets, particularly on the equities side, are optimistic, with valuations above their long-term averages and a range of sentiment indicators suggest that investors are relatively bullish about the prospects for 2021 and not without good reason. If we see a successful vaccine rollout and the reopening of the global economy, then we’re likely to see a meaningful rebound, not just in economic activity but also in corporate profitability. This should all underpin a decent year going into 2021.
The concern is how much of this recovery is already priced in – at Moneyfarm, we believe some of it is. Nonetheless, if we continue to see strong operating momentum from a broad range of businesses, that’s something that we don’t think is yet fully reflected in financial markets.
The question also comes down to not only the speed of global recovery but the extent of it. Investors will be asking themselves whether they expect economies to accelerate beyond where we were before Covid-19, or indeed if we should expect the kind of slow, measured recovery that we saw after the last crisis.
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The impact of Brexit
After years of debate, compromise and a fair amount of bluster, the UK and the EU finally reached a new trade agreement in the twilight of 2020. The document itself is some 1,250 pages long, an agreement that has done little to clear up some of the confusion and concern inherent in a political and economic transition this complex.
The impact of this trade agreement is difficult to project. How can we evaluate the deal, then? It’s not a straightforward process, given the complexities and counterfactuals involved, and that’s before we even consider the impact of Covid-19 alongside it. In macro terms, we should probably keep things simple and focus on growth and inflation.
Looking back at history, the story here is not as clear-cut as you might want. If we look at UK and EU GDP growth over the last 10 years, the UK outperformed during the Eurozone crisis but was already weakening prior to the 2016 referendum – although it continued to do so thereafter.
The second consideration – consumer prices – should be easier to map. Again, turning to history, we see a fairly sharp increase in UK retail prices following the referendum in 2016, driven to a large extent by sterling weakness. In 2020, weak demand has driven down inflation in the UK, as it has done elsewhere in Developed economies. If there is disruption (at least in the short-term) from the end of the transition period, you might expect to see this in higher prices.
Ultimately, we think that this deal, however ‘thin’ it might be, is better than the disruption that no-deal would have caused. We expect that there will still be some disruption, particularly given the timing of the deal and the fact that the terms must be somehow worse than the ones the UK previously enjoyed. So, although we expect to see an economic recovery in 2021, the impact of Covid-19 will make evaluating the real consequences of the trade deal tricky, to say the least.
The acceleration of existing trends
The final point to consider when we look ahead to 2021 is the continuation of trends that dominated 2020. The coronavirus crisis has shaken the lives of everyone to differing extents, with many finding their working and social lives completely unrecognisable. Some of these trends will continue even after Covid-19 has been effectively dealt with.
The most obvious candidate to talk about is digitalisation. This is a trend that’s been around for a number of years, but one that the pandemic has only served to accelerate and highlight. You only have to look at the number of people currently working from home to see the impact Covid-19 has had on digital development, with many expecting their working arrangements to be forever changed as a result of 2020.
The coming year will, all things being well, give us an insight into how the world of work is going to look going forward, as people negotiate their arrangements in the wake of Covid-19. It should also see the valuations of digital-first or digital-only companies (Zoom being the most obvious and recognisable example) settle down – last year, any significant coronavirus news rocked these valuations in both directions. We may also see a reappraisal of growth stocks, particularly within US tech, although this is a topic to delve into on another day.
Similarly, the question of sustainability is very much at the forefront of not just investors’ minds but also in the minds of governments and global populations. This is a trend that we see continuing into 2021, particularly given that 2020 has highlighted some of the environmental issues we may have to deal with in the near future.
The isolation and localisation made necessary by Covid-19 across 2020 may lead to a general reconsideration of supply chains from governments and corporates alike. At various points, the pandemic has brought into sharper focus some of the unsustainable elements of global supply chains and the security of supply has been brought into question on a number of occasions. 2021 could be the year that we see governments and corporates begin to think a little more carefully about the sustainability of their supply operations on not just a moral but a practical level.
As ever, we believe the best way to navigate 2021 as an investor is to keep a long-term focus. There are reasons to be optimistic about the future as we leave behind what was a difficult year for so many people, businesses and governments, but the takeaway for investors is to stick to their pre-pandemic goals. With sound planning, effective portfolio management and broadly conservative positioning, investors will be able to view 2020 as an aberration that came with its own opportunities. Looking to 2021, though, the outlook is far sunnier.