Strategy team: Kevin Gardiner
A new strain of the virus here in the UK, and the associated last minute curtailment of Christmas travel plans, has refocused investor attention on the risks of renewed disruption to business. The UK's borders have been largely closed as other countries respond to its predicament: coming so close to the end of the Brexit transition period, with UK and EU negotiators unable yet to achieve a deal, the prospect of supply chains running short seems real again. As yet scientists do not seem to know much about the new strain, the extent to which it really is confined to the UK, and whether vaccines will work as effectively against it. Meanwhile, "normal" COVID-19 contagion continues apace in the US and across much of Continental Europe.
The economic damage done by these latest local developments will depend on how long the border restrictions (and the no-deal risks) stay in place, how one-sided they turn out to be (the UK may remain more open to imports than other countries are to exports from the UK), and the impact of the intensified domestic curbs on business.
As we write, UK and European stock markets are down around 3%, sterling has fallen by almost 2%, and 10-year gilts have rallied by almost a percent – larger moves than usual, but not dramatically so.
To date in 2020, stock markets have been more resilient even than we'd thought they would be. This latest uncertainty may trigger wider profit-taking. However, policy will remain globally supportive – another tranche of US fiscal support moved closer at the weekend – and we think investors collectively will mostly continue to "look across the valley" at more sustained economic recovery ahead (globally, but also here in the UK). Adaptation to more socially-distanced ways of doing business will continue, and to date at least, the signs were that the second wave of contagion had not hit economies as hard as feared. Resumed setbacks now will bite at higher levels of activity than they might have done.
Our UK-managed portfolios in particular will continue to be supported by exposure to global franchises and overseas currencies, and as always contain some protection against short-term volatility.
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