“’Twas the nightmare before Christmas,” says Stephen Innes of Axi. The appearance of a new and potentially more transmissible strain of Covid-19 in southern England has squashed hopes of a traditional pre-Christmas “Santa rally”. With chaos spreading through supply chains and talk of domestic virus restrictions remaining in place until Easter, markets have not been feeling festive. The FTSE 100 fell by 2.9% on Monday before paring losses, with the FTSE 250 finishing the day down more than 2%. The price of oil dropped 4% and the pound had its worst day since September.
Recovery delayed, not denied
If the early reports about the new virus strain are accurate then “extended and severe lockdowns for the majority” of the first quarter of 2021 now look a real possibility, says Innes. That is undermining optimism about a swift economic rebound in the new year.
The UK is heading for a double-dip recession, says Dan Hanson of Bloomberg Economics. GDP was already set to contract this quarter because of the lockdown and now looks set to fall during the first three months of 2021 too. There was better news this week from America, where congressional leaders agreed on a $900bn pandemic relief package.
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For the global economy, the key story for next year remains a recovery on the back of mass vaccination, says Jeremy Warner in The Daily Telegraph. Ongoing fiscal and monetary support are laying the groundwork for a roaring 2021. Between April and June nearly “one in every three pounds earned” in the UK was being saved, with Britons now sitting on an estimated £200bn savings pile. When the pandemic is over “collectively we will want to treat ourselves”.
Buy Britain
The FTSE 100 has continued to underperform peers this year, falling 15.5% so far in 2020. That compared with a 9% fall on the Euro Stoxx 50 and a 13% rise of the S&P 500. Yet a long period of disappointment gives the FTSE room to rise, says Chris St John of AXA Investment Managers. “Deal or no-deal, we expect the FTSE 100 to go up”. A Brexit deal would give investors the confidence they need to buy into Britain again. On the other hand, no-deal would knock sterling lower, which will make FTSE 100 earnings – 70% of which come from overseas – appear stronger in pound terms. That said, the effect of a disruptive no-deal on mid- and small-cap shares would be “indiscriminately” negative.
Still, as MoneyWeek has pointed out for much of the year, near-term disruption looks to be in the price. On a cyclically adjusted price/earnings ratio (Cape) of 11.8 as of the end of October, the UK market trades at a huge discount to the developed market average of 23.4.
But tread carefully in America. The S&P 500’s Cape ratio reached 33.1 last month – higher than the 32.6 it hit in the run-up to the Wall Street crash of 1929. There is a lot of potential downside for US equities.
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