Stephen Jones By
The turn of the year has rarely given so much change with the results of the U.S. election and Brexit looming.
It is time to reflect on the momentous year that has passed, as we await the final installment of the divorce saga between the UK and the EU. Looking back and remembering that global stock markets have created a return for the UK of just over 13 percent. This year, with investors just marginally above the average annual return since 2003, the question arises as to what all the fuss was about.
Consensus economic estimates indicate that even at the beginning of 2023, the U.K. The economy will already be 2.2% lower than it was in 2019, with the credit crunch contributing to U.K. losses continuing. Economic growth – the equivalent of a deficit of 12% at the end of last year – and a gap that is beginning to expand. The 11 percent recession predicted for 2020 dwarfs the financial crisis’s big decline and has already brought major changes to the way we operate, recover, and play. Therefore, anticipating the Covid 19 shock to be less prolonged would be naïve. A long Covid would not be limited to one health condition.
The Covid 19 shock was as much a health care crisis as it was in health itself – it was an unintended result of a productivity model running health services. Next year, the government will act to build the required reserve capacity to keep the economy open longer should another pandemic occur. Given the poor economic outlook, however, it is likely that investment will be delayed. Nonetheless, public spending would have to increase, at least on the NHS. And if the economy does not produce the required revenue, or if the Bank of England stops printing money (to preserve its credibility), taxes will have to increase.
We saw high investor demand for environmental, social and governance (ESG) products in 2020, and through the chaos, renewable assets sustained their popularity. Recently, with China and the U.S. joining the EU and UK shortly. The renewable and green energy market appears to be well placed as a priority for investors, with efforts already announced. A steady supply of assets inevitably helps to sustain much needed strength in global demand, given the scale of investment required.
In stark contrast, over the past 10 years, non-renewable energy stocks have been awful investments – while global equities have delivered 10.6 percent annualized returns, the energy sector has recorded 1.5 percent annualized losses. This continuous underperformance has left the energy sector with a total value equal to that of Amazon in the MSCI World Index (and far below that of Apple and Microsoft). A weakening U.S. dollar — we’ve been in one since the beginning of summer — eventually boosts the global economy, pushing up oil prices in turn. Sector responsiveness on the supply side is jeopardized after years of underinvestment, possibly setting the stage for pressure on oil equities. As a successful ESG investment tactic, the poor performance of oil equities has flattered “exclusion”. If it will look as good when oil prices increase remains to be seen.
The U.S. presidency, Covid-19 aside, was the case of the year. Equity markets would certainly have preferred to see Trump re-elected, considering his highly pro-business agenda. Nevertheless, in the aftermath of his failure, investors have taken refuge in the fact that the politics of tweets has come to an end, that a future split U.S. Joe Biden will be put in his place by Congress, and there is hope for quieter geopolitics. The victory of Biden may well mean that the headlines between the United States and China are taking on a more subdued tone. Recent attempts have been made to compel more than 350 Chinese businesses to withdraw from the U.S. stock exchange if they do not open their books to the public. Around the same time, due to their links to the Chinese military, more Chinese companies have been blacklisted. All of this means that tensions with China will not ease much.
It was impressive to watch Trump coordinate his own farewell round, raising more than a quarter of a billion dollars while Biden was building his cabinet.