When the Charles Stanley Investment Strategy Committee (ISC) met on Friday 13 November it was agreed that our base-case scenario could stay the same.
We had anticipated a Biden Presidency in the US, which still looks the most likely outcome. It is going to take time to hold recounts and resolve legal challenges in a number of swing states. More political uncertainty is caused by the need for two run-off elections for the Senate in Georgia, where the result the first time around was very close.
We assume Republican victories with a Republican-led Senate, which means constraints on the radical agenda Mr Biden put out to the US voters. Were the Democrats to win control of the Senate then there could be higher taxes, more regulation of corporates, stronger pro-union laws and other measures which markets would need to discount.
The Committee noted the good progress with developing vaccines to combat Covid-19 but cautioned that it is still going to take many months to complete approvals, ramp up production and get enough people vaccinated to allow complete relaxation of controls. We are left facing a winter where governments will persevere with anti-pandemic measures, which damage all parts of an economy that depend on social contact.
For the year ahead, economies and markets will need continuing monetary stimulus and fiscal support. The recent slowing of bond purchases and consideration of whether a further fiscal boost is possible either side of the Atlantic is a headwind for equity markets.
The ISC explored the way the pandemic has boosted both the digital and green revolutions and how the announcement of a possible vaccine brought a sharp return to interest in more traditional shares that have been damaged by lockdowns. Persistent social distancing and selective closures will mean permanent scarring in badly-affected sectors and will require careful selection for those wishing to take positions in the recovery stories.
The outlook is for continued low interest rates by the advanced countries, and for only a modest pick-up in inflation next year – despite the attempted monetary laxity. In these conditions, government bonds are likely to be underpinned by central bank intervention whilst corporate bonds will be more volatile with bigger variations dependent on the state of balance sheets and cash flows against the background of continued stress in some sectors.
The ISC retained its neutral rating for both global equities and bonds. It lowered its rating on cash from “positive” to “neutral” as a signal that with some recovery in the air it makes sense to have available cash invested. In recognition of the better state of recovery in Asia compared to the Americas and Europe, the Committee raised its rating on Asia ex-Japan equities to “positive” and Japanese shares to “neutral”. Several important Asian countries have had more success in taming the pandemic than the west – and have capacity to boost output and incomes from here.
On bonds, the Committee expressed the view that preferred duration should be short or intermediate rather than long – given the low yields now available and the possibility of some general economic recovery and some pick-up in inflation.
The Committee also downgraded precious metals to “neutral” after a good performance this year against the background of the big dip in equity markets over Covid-19 measures. The Committee favours some investment in industrial metals for recovery as an adjunct to precious metal holdings for those riskier portfolios that do have some commodity exposure.
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