Nov 09 2020

Joe Biden seems set to become the 46th President of the United States as over the weekend most major news outlets projected his victory, and numerous world leaders queued to congratulate him.

Despite what appeared at first to be a terribly close-run affair, Biden’s success in hindsight now looks relatively comfortable, as with a couple of states still to formally declare, he leads the popular vote by more than 4 million and according to Bloomberg’s latest estimates has won 290 electoral college votes versus Donald Trump’s 214; the threshold to win is 270. Biden is also projected to win the state of Georgia’s 16 electoral college votes which would eventually put him on a total of 306, though the state still looks to be heading for a recount.

Several important swing states were won by fine margins, and only as late-arriving postal ballots fell heavily in favour of Biden; something the Trump campaign has focused on in the various legal actions they have initiated in trying to contest the result. We had identified Trump’s aggressive challenging of results as a potential tail risk to the outcome of the election and its impact on financial markets, but despite lots of hot air and rhetoric, the most damaging version of this scenario has not yet come to pass.

While the Democrats have won the Presidency and retained control of the House of Representatives, the Republicans are likely to retain control of the Senate, though the final tally of seats will only be settled in January after both of Georgia’s Senate races failed to produce a definitive result. This means that a Biden administration will find enacting his major tax and spending proposals difficult and will need to rely on bipartisan support. That said, increased policy certainty, trade multilateralism and a pro-immigration stance should generally benefit the economy, if not drastically change its growth trajectory.

The Biden campaign is largely ignoring Trump’s efforts to undermine his victory, with the President-elect planning to immediately unveil his transition team’s Covid task force this week, making virus management his first priority.  We view this as a positive sign as the first step to achieving a sustainable recovery will come through a strong health solution to the Covid crisis.

Away from the election we saw a positively surprising set of US jobs data for October, with 638,000 added, beating consensus expectations. While the economy has reclaimed 12 million jobs from April’s trough, this is still only just over half of the jobs lost, with employment still 10 million lower than pre-Covid as the chart below from Oxford Economics shows. This serves to highlight the ongoing importance of concerted support as economies recover:


In the UK, following the start of the month-long English lockdown, Chancellor Rishi Sunak relaunched the furlough scheme and committed to its running through to March 2021 at least, with the Government again paying 80% of workers’ wages for businesses that are shut. While no doubt welcome to many businesses it still does little to address their fixed costs, and to us suggests the Government may look to keep restrictions tight in the months ahead. In addition, the Bank of England announced a further £150bn of quantitative easing to support the Treasury’s action.

Consternation has grown at the Government’s poor presentation and application of data relating to Covid. Slides presented by the Prime Minister and his advisors at their press conference two weekends ago were quietly revised downwards in their severity during the week, now showing much lower modelled fatalities and hospital admissions; something we commented on last week.

The Office for Statistics Regulation criticised the Government for its lack of transparency over publication of data about the pandemic amid concern that it failed to publish the data sources, models or assumptions on the case for lockdown for several days after the televised presentation, only doing so the night before MPs voted on the restrictions. They commented: ‘there is potential to confuse the public and undermine confidence in the statistics’.

The day after the English lockdown came into effect, The Office for National Statistics’ weekly infection survey suggested that the rise in Covid prevalence had levelled off and even fallen in the past week, per the chart below. This survey is based on the swab tests of a randomised sample of 650,000 people and is one of the best data sources we have for Covid infections in the community as it is much more likely to pick up asymptomatic cases:


There have been ‘false positives’ in this data set before as seen in mid-September, but trends elsewhere are also encouraging, with numerous Tier 3 areas including Liverpool, Manchester and Nottingham seeing large drops in new cases in recent weeks.

This aside, as we and many others have noted before, any potential gains from locking down are meaningless without a concrete plan to consolidate those gains; this is before considering or confronting the significant negative effects that arise from the same actions.

On the first of these points, NHS Test and Trace had its worst ever week last week having failed to reach more than 40% of infected peoples’ contacts, while a trial in Manchester of a rapid Covid test at the heart of Boris Johnson’s mass-testing strategy (‘Operation Moonshot’) reportedly missed more than 50% of positive cases. The Government has spent £323m on these tests to date.

On the latter point, leaving aside the well-trodden negative economic effects of lockdown, both hard and anecdotal data relating to poorer health outcomes are increasingly concerning. The Institute for Fiscal Studies has found more than 3.5 million people over 50 had their hospital treatment cancelled between February and May this year, while some 10.2% of people who thought they needed to see a GP were not able to get an appointment. A further 13.7% did not attempt to see a GP even though they felt that they needed to see one – dissuaded variously by claims of an overwhelmed NHS, the appeal to ‘stay at home’, or fears of catching the virus. Those affected are more likely to be less well-off and suffering from long-term health problems, serving to widen the health gap between rich and poor. Elsewhere there have been large rises in mental health problems, domestic violence and loneliness, all of which some would argue should be attributed to Covid rather than lockdown itself, though others would argue vociferously otherwise.

In markets, equities were broadly very positive, belying the apparent uncertainty resulting from the US election. The biggest gains were seen in riskier areas of the market – parts of emerging markets, Europe and the UK – helped by a weakening US Dollar as investors priced in the increasing likelihood of a Biden victory. In Pound terms, European equities were best of the major regions, rising by 7.3%, with the FTSE 100 slightly behind on 6%. The S&P 500 eventually rose by 5.6%, while Asian equities gained 4.3%.

More interesting moves were seen beneath the surface of the headline index figures. Monday and Tuesday saw a continuation of the strong ‘value’ equity rally hinted at in recent weeks as investors priced in the near certainty of a Democrat ‘blue wave’ in the US election. As it became apparent that this was not going to be the case, we saw a rotation back to those stocks that have historically performed well in a low tax and interest rate environment; predominantly technology and other ‘growth’ equity winners from 2020.

Government bonds fell during the week despite a brief rally on Wednesday and Thursday; Gilts and index-linked Gilts dropped by 0.4% and 1.3% respectively. Riskier investment grade and high yield corporate bonds rose strongly in the risk-on environment. Gold and Silver both rose in value, by 2.1% and 6.8% respectively, pricing in continued low nominal interest rates but a still-good chance of fiscal stimulus.

The week ahead should be a little calmer than last, though the potential for surprises remains with regards the US election. We hope that Covid data trends continue to show a drop in new cases and note that more incoming new treatments continue to bolster efforts against the virus. As always, good portfolio diversification will be the key to navigating smoothly through the coming period.

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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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