Nov 30 2020

A busy week domestically saw the Chancellor deliver his Spending Review and the Prime Minister updating the country on the ‘new’ tiered system that will come into play when the English lockdown ends on 2nd December. 

Rishi Sunak’s spending review brought with it sobering projections from the Office for Budget Responsibility (OBR) that sees UK GDP falling by 11.3% in 2020 – the largest fall in 300 years – not regaining its pre-pandemic level until late-2022 and remaining around 3% smaller than it otherwise would have been by 2024/25.

An immediate caveat came in that this central projection only models an effective vaccine’s introduction from the middle of next year, with more timely estimates such as those from Capital Economics suggesting that GDP could regain its pre-pandemic level nearly one year earlier with a good tailwind as per the chart below:


A number of measures were announced by the Chancellor, including a reduction in the UK’s foreign aid contribution from 0.7% of GDP to 0.5% in 2021; a reduction of around £4bn that still makes the UK the second largest aid contributor in the G7, but one that is the first major cut to public spending since the pandemic began and also breaking a Conservative election manifesto commitment.

Public sector wages will be frozen, though one million NHS workers will receive a pay rise and those employees earning less than the median wage will be guaranteed a £250 raise. In making this announcement, the Chancellor highlighted the differences in job security currently between the public and private sectors.

Finally, on top of a further £55bn (2.4% of GDP) of Covid-related spending in 2021/22, non-Covid day-to-day spending is set to increase by an average of 3.8% per annum from 2019/20 to 2021/22 in real terms; the fastest rate in 15 years. Infrastructure spending will play a major role in the Government’s agenda over the next 5 years, with £600bn due to be invested over that period, including £100bn next year alone, focusing on homebuilding, better broadband and the Prime Minister’s green agenda.

While significant elements of positivity were apparent, the figures here highlight that the road to economic recovery remains riven with potholes, with many commentators warning that the Government should not withdraw its support too much too soon.

The Prime Minister announced the new tier system rules last week that will see Tier 2 and 3 restrictions apply to 99% of England from 3rd December. All three tiers will face limits on gatherings, but non-essential retail will reopen and international travel will resume. As under previous regimes, the hospitality and entertainment industries will take the biggest hit under the revised restrictions, with pubs and restaurants only allowed to stay open to serve ‘substantial meals’ in Tier 2, and only for takeaway service in Tier 3. Households will be banned from mixing indoors, and only able to meet outdoors in groups of six.

Christmas grottos will be allowed to open across all tiers, but sitting on Santa’s lap will be banned, however those in Tier 3 will not be able to attend school nativity plays.

The reaction to the new tiered system has been largely negative, with a number of Conservative MPs expected to vote against the measures on Tuesday 1st December in Parliament. Their concerns centre around a lack of evidence for the new restrictions, with swathes of the country experiencing very low rates of infection sent into the highest tier, and as with all lockdowns this year, a lack of any economic impact analysis. The Government will provide some limited analysis on this latter point, but it is not expected to be particularly detailed. The Centre for Economic and Business Research (CEBR) has estimated that the new tiers will cost the UK £900m per day and result in GDP being 13% lower this December compared to last year.

Elsewhere, ‘flash’ PMI business survey data were released for developed markets including the UK and Eurozone, which saw falls in services business activity and sentiment as expected but rises in the equivalent manufacturing surveys. In the UK as can be seen below, the four-week lockdown through November resulted in a sharp downturn in the services business measure but a rise in manufacturing as those businesses were much more likely to remain open, with the overall ‘composite’ survey figure surprising to the upside:


With significant restrictions remaining after 2nd December, there will be a slower bounce back in activity than seen after the first lockdown, but as implied above, looking beyond the next six months or so, positive vaccine news may mean that GDP growth is much stronger in 2021 than is currently anticipated.

Both equity and bond markets saw broadly positive returns last week as broadly positive sentiment stemming from vaccine news continued to drive prices upwards.

In equities, we saw riskier regions of emerging markets perform strongly again, with Latin American equities in particular outperforming with a 3.1% return in Pound terms. Japanese equities were also relative winners with a 3.0% rise, with the US (1.9%) Europe (1.4%) and Asia (1.1%) further back.

UK equities struggled this week with the large-cap FTSE 100 index rising by just 0.3% and the more domestically focused FTSE 250 index falling by 0.2%. Both indices took a breather after outsized gains seen earlier in November following the original vaccine announcements, but they should be set fair for the medium term if events continue to unfold as expected with inoculations beginning in early December.

Both gold and silver prices continued to fall as investors shunned these safe havens in particular. The gold price fell by more than 5% and that of silver by nearly 8%, with both metals’ recent price movements now moving towards an ‘oversold’ status contrary to their positions just a couple of months ago.

Finally, parts of the fixed income markets were volatile, particularly UK inflation-linked government bonds which saw large swings related to the Chancellor’s reclassification of inflation measures in his spending review. Most sectors ended the week with positive returns however, with UK Gilts rising by 0.9% and both investment and sub-investment grade bonds close behind.

This week should see greater clarity around the status of the AstraZeneca vaccine which while reporting initially positive results last week came under subsequent scrutiny with regards the provenance of its dosing regimens and the data behind them. The UK is still pushing for the vaccine to be approved by the Medicines and Healthcare products Regulatory Agency (MHRA), while NHS hospitals have been told to prepare to ‘mobilise’ from as early as Wednesday 2nd December, as the Pfizer vaccine is expected to gain approval this week.

We hope that this is indeed the case and that we can begin to move towards an exit from the pandemic. As mentioned last week, recent optimism has driven a rotation within equity markets away from more richly valued companies, sectors and regions and towards those lowlier valued as a recovery takes hold. With positive vaccine news feeding into a more positive virus narrative, monetary and fiscal policy set to remain loose, and domestically, Brexit uncertainty to hopefully continue to fade away, we think the scene may be set for this trend to continue.

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The value of investments may fluctuate in price or value and you may get back less than the amount originally invested. Past performance is not a guide to the future. The views expressed in this publication represent those of the author and do not constitute financial advice.

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Andrea Barker
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