After grappling with the impacts of a global pandemic and the continued Brexit overhang in 2020, the Franklin UK Equity Team outlines how the removal of these uncertainties in the United Kingdom could bring brighter investment prospects in the year ahead.
Even if investors could accurately predict events, 2020 has proven once again that predicting market movements based on this foresight is near impossible. However, this doesn’t mean that we should abandon our investing principles; we should remain vigilant to what we believe the market is factoring in and be nimble enough to adapt to a dynamic environment.
Below outlines some of the important events and milestones that we see on the horizon for a UK-based investor in 2021.
- Synchronised global economic growth will likely be a feature for at least the next year as mobility restrictions are eased and demand improves. It is not often that global growth is predicted to reach mid-single digits for two consecutive years—as some forecasts show for 2021 and 2022 —so this should provide a supportive backdrop to risk assets. Furthermore, with the adoption of technology across vast swathes of the global economy in 2020 due to the pandemic, there is potential for productivity improvements to become embedded and enhance the long-run rate of growth. Once the uncertainty around Brexit is removed, we could see UK gross domestic product (GDP) grow by levels not seen since the 1970s. The economic out-turn domestically in 2021 is likely to be particularly pronounced on a relative basis due to statistical quirks in the data. The calculation methods employed in the United Kingdom appear to have exaggerated the 2020 economic decline and should correspondingly boost the 2021 rebound.
- With the United Kingdom stealing a march on vaccine approvals and more set to be approved in the coming weeks, we are likely to see COVID-19-related mortality drop significantly in the coming weeks. The vaccination programme is prioritising the roughly 10 million people who are either over the age of 75 or work in health or social care. To put this in perspective, roughly 75% of the reported COVID-19 deaths in the United Kingdom have been in the over- 75 age category. The effect this fall in daily reported deaths will have on sentiment and behaviour, as well as government restrictions, remains difficult to predict, but will be a key element as to how the economic benefits play out. Despite dramatic increases in unemployment globally, the United Kingdom has had relative success in at least delaying job losses through job support schemes. As a result, layoffs across various cohorts over the age of 25 have been limited. Consequently, we have seen a dramatic increase in savings levels this year, with the savings ratio peaking at 29%. This puts the UK consumer in good stead to spend as the travel, hospitality and leisure sectors reopen. Housing data has confounded any expectations that we had at the beginning of the pandemic. Average house prices have reached record highs, with transactions reaching levels not seen since 2007. Clearly, the stamp duty relief that was introduced this year has been the driving force behind this, coupled with the dramatic fall in interest rates. With the stamp duty relief measures expiring in March, a short-term hiatus is anticipated. Yet, there is a huge cohort of ‘reluctant renters’ who would be financially better off on a monthly basis if they could get onto the housing ladder. This factor, combined with continued undersupply and a government impetus to help first-time buyers, means we remain positive on the UK housebuilding sector despite short-term uncertainty.
- With a strong slate of potential listings, the run of form for initial public offerings (IPOs) is set to continue into 2021. From a year of corporations raising capital for defensive purposes, this signifies a change in risk appetite for businesses. Shareholder distributions will also be back on the agenda as suspended dividends in many areas are expected to return.
The economic impact of the Brexit deal uncertainty has been somewhat overwhelmed by the fallout from the COVID-19 pandemic. At time of this writing, a deal remains elusive, but the dividing issues should not be insurmountable. A resolution would lead us to a broadly constructive picture for sterling and, in turn, favour domestically orientated equities. Whatever the outcome, it is hoped that greater clarity will allow the conversation to move on after four years of wrangling and uncertainty.
Removing the ‘Brexit overhang’ could entice the return of the international investor to the UK equity market and serve to narrow the valuation discount that persists for UK shares versus their international equivalents.
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