THIS year will live on in everyone’s memory for all the wrong reasons, and undoubtedly we are all glad to see 2020 draw to a close.
Unsurprisingly it has not been a great year for stock markets, particularly the UK. As things stand now, the FTSE 100 is still 13.04 per cent lower over the year, the European index is marginally up (0.75 per cent), the Hang Seng is 6.82 per cent lower and the S&P 500 is 6.41 per cent higher.
The exception to this somewhat muted performance is still the Nasdaq, which is up an impressive 36.62 per cent, led by the hugely impressive performances from the large technology stocks.
Notwithstanding the obvious relief of the vaccine being rolled out, looking forward to 2021 there are still reasons to be cautious.
The loosening of restrictions for Christmas brings with it the possibility of a renewed surge in January and thus another period of curtailed economic activity. We have also seen Christmas restrictions for Germany as cases rise there – a reminder (if any were needed) that the pandemic is far from over.
There is now another major risk to recovery: our old friend Brexit. This weekend we saw a last-ditch attempt to reach an agreement, but it resulted in yet another extension. We now have yet more uncertainty, and the indications do not appear to be promising as huge differences remain.
The impact on the UK economy is significant. We have seen the beginnings of a recovery in economic growth terms, this began in May and figures were released recently which slowed a rise of 0.4 per cent in gross domestic product (the usual measure of economic growth) in October.
On the surface this looks promising, but there may have been a boost from exporters stepping up activity in anticipation of Brexit and since then we have had more lockdowns.
More worrying, however, is the sharp fall in business investment. The Office for Budget Responsibility predicts a very gradual rebound after a pandemic-related 18.1 per cent fall this year of 1.2 per cent in 2021, suggesting that it will take another year for a meaningful pick-up in business investment and it could take until 2023 for it to get back to the 2019 level.
Consumers are likely to recover more quickly, however, which is clearly good news for many companies. This view of the future for business investment is reinforced by the OECD’s view that lack of investment will weigh heavily on the UK’s recovery and is likely to be running at 80 per cent of pre-coronavirus levels next year. Add to this the uncertainty of how foreign investment will be impacted by Brexit – clearly an unknown quantity – and the picture looks even more uncertain.
This goes a long way to explaining why the UK market has lagged so far behind other stock markets and indeed why it continues to do so. It's a sharp reminder that in investment terms we are now operating in a very global market and we ignore this at our peril.
:: Cathy Dixon is a partner at the Belfast office of Smith & Williamson Investment Management. This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise.
