Business

Looking backwards and forwards

Since 1995 the All-Share index has risen by an average of over 23 per cent in the three years after the curve has sloped upwards

LOOKING back at 2020 I think we have never been more relieved to see the year finish and what a year! Certainly, it has been a year like no other and it is to be hoped that we will never see its like again.

And as we look forward to better things in 2021, it's worth just taking stock of what we saw over the past 12 months. After the initial reaction by markets to the pandemic in March we saw recovery by varying degrees over subsequent months.

The UK market, as measured by the FTSE 100, saw a fall of 13.08 per cent over the year which compared unfavourably with most other major markets. The outstanding performance came from the Nasdaq index in the US which saw an impressive rise of 39.37 per cent over 2020, mainly due to its high exposure to the technology industry which was the stand-out feature of global markets.

Elsewhere markets saw varied performances: European markets ended the year in positive territory (up 1.6 per cent), Japan was up 18.7 per cent and Hong Kong was down 5.67 per cent.

So far this year the UK market has benefitted from the Brexit deal and the market is up just over 6 per cent. However, there is still much uncertainty connected with leaving the European Union and it will take a number of years before the impact can be quantified.

In the meantime, the world is still facing the pandemic which brings with it all manner of challenges and the US is on the brink of a change of regime, but the Presidential election in November has brought to light deep divisions in American society. Europe also faces a changing landscape with Brexit.

The future for the markets is always hard to predict and this year is no exception. There are a number of conflicting signals which make the future direction very unclear. After such an unprecedented year, there has been a general consensus that equities will rise this year and in the UK this is endorsed by the gilt market, where an upward sloping yield curve is a positive indicator for shares.

Since 1995, for example, the All-Share index has risen by an average of over 23 per cent in the three years after the curve has sloped upwards (when 10-year yields have been above three-month rates) but has fallen when the opposite is true. If investors expect yields to rise, it is in times when the economy is doing well. Another positive signal comes from retail sales, which are high relative to the All-share index.

On a less positive note, the ratio of broad money stock in developed economies to the MSCI world equity index has also proved to be a useful tool in assessing which way the market will move; the current ratio is close to a record low, which points to a fall in the market.

Indicators cannot be relied on as being infallible: with the UK economy now back in recession and unlikely to see recovery over the next few months with the worsening Covid situation, we are likely to see volatility in the markets. Predicting the stock market is fraught with peril: after all, who could have predicted the path it took last year.

:: 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.

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