Guy Stephens: "2020 is going to be a year of two halves, the virus followed by a return to familiar pre-virus influences."

The recent preoccupation of the media with all things Covid-19 related has pushed other major market influences to the back of investor minds over the last three months, writes Guy Stephens, who says it is sensible to look forward and return to these issues that are still ever-present in the background

The first of these three big issues is the dreaded Brexit. We seem to be travelling down the same road as we did in 2019 with a looming deadline ahead of a possible no-deal cliff edge hard Brexit. We detect a certain degree of market fatigue with the whole saga, although it has continued to undermine the sterling against other major currencies and deter global investors from the UK equity market. The UK equity market underperformed world indices for much of 2019 and before that.

2020 to date has been no different and this underperformance has continued, which has to be partly due to Brexit uncertainty.

There is probably also some influence from the UK's handling of the COVID-19 pandemic and the numbers of deaths which have been the highest of any developed economy outside of the US, according to John Hopkins University data.

Other measures have also shown that the expected economic hit to GDP is likely to be the highest in the UK, says the OECD, but this does need to be put into context regarding the structure of the UK economy and the high proportion of service industries such as retail and leisure. That said, compared to countries like Germany, the UK has suffered and there will be serious questions to answer in the aftermath regarding the government's responses and strategy.

It is one of the few occasions where there are directly comparable experiences, which will put those in power on the backfoot. We are some way away from the next election, but this will likely reappear in five years' time and could be crucial.

As to where the Brexit negotiations end up, the end of June saw the deadline for an extension request to the transition period which ends on 31 December 2020. Prime Minister Boris Johnson has ruled this out and we believe the markets are largely discounting this as a negotiating position.

Even if we did get to the middle of December without a deal, the EU are unlikely to refuse an extension given the likely chaos that would follow. As we have previously said, it is likely that a framework deal can be agreed preserving the status quo with various detailed trade agreements to be worked through in the years ahead.

A protracted exit which could take many years to complete is quite possible. In the meantime, if bi-lateral trade deals can be agreed with other nations where talks are supposedly taking place, such as Japan and the US, then we may see a more positive outlook from the perspective of an international investor, but this is all conjecture at the moment.

The other ongoing market influence is the approaching US Election and wrapped up with this is the trade war with China. The immediate risk of market unfriendly policies from a Democrat President has been reduced by the nomination of Joe Biden, a relative moderate compared to Bernie Sanders. The markets could probably take this in their stride without too much upset as he would likely take a less combative approach to China. President Trump's desire to keep the equity market buoyant is heavily influencing his approach to China because he knows that if he aggressively blames them for COVID-19 and ratchets up the trade war, this will cause weakness in the equity markets.

However, he also needs to deflect forthcoming Democratic criticism of his handling of the virus pandemic and his weak support for Black Lives Matter in order to appeal more widely to voters. This contradiction is why the polls are putting him firmly in second place and most pollsters are predicting that the election is Joe Biden's to lose.

So, 2020 is going to be a year of two halves, the virus followed by a return to familiar pre-virus influences. With hindsight, the virus will be viewed as a force of nature that reminded the human species how vulnerable we are, and we should consider changing our lives and rebalance our co-existence with the planet we inhabit.

The threat of Covid-19 will not go away and we will have new fears of the next strain come the autumn. As investors this will influence the winners and losers of the future with those most able to adapt being the most successful.

Guy Stephens is technical investment director at Rowan Dartington

Excerpt from:

Guy Stephens: The Forgotten US Elections, trade wars and Brexit - http://www.professionaladviser.com