Overview
What turned out to be a hugely eventful year ended with an eventful month as the UK became the first Western country to start administering a COVID-19 vaccine, and a ‘Brexit’ deal was finally agreed.
The rollout of the vaccination program, which also started in the US and EU later in the month, is a hugely important moment in the course of the pandemic.
However, some have warned that it will take more than a few months before the most at-risk category of people have been vaccinated.
Also during the month the UK and EU agreed a tariff-free, quota-free trade deal, bringing to an end almost four years of negotiations.
The question now is in what areas, and by how much, the government wishes to deviate from the Single Market rules.
Whilst political and healthcare news dominated the month, most developed economies followed the pattern of recent months; continued growth in the manufacturing sector was outweighed by the faltering services sector.
Where stock markets are concerned, it has generally been the beaten-down industries such as leisure and retail which have lead markets higher since effective vaccines were announced.
However, over a 6 month period the technology-heavy US stock markets have significantly outperformed European stock markets.
Over the last 6 months the FTSE 100 returned 4.91%, whilst the Euro Stoxx 50 returned 10.04% and the US S&P 500 returned 20.55% (all in price terms).
The Japanese Nikkei 225 gained around 24.06% over the same period.
The broad emerging markets index rose by 28.99% in US Dollar terms.
Key US government bond yields rose over the last 6 months as investors began to price in economic recovery.
US Economic News
The major development in the US during the month was that Congress finally agreed a $900 billion relief package.
If no agreement had been found then the government would have been forced to shut down and millions of Americans would have been left with no income.
The deal is therefore vital in ensuring no further economic damage is done.
During December the economy still improved at a robust rate, though slightly slower than during November.
As infection levels rose and tighter restrictions were introduced businesses reported slower employment growth plans. Optimism regarding the year ahead fell to a three month low.
As expected it was confirmed that the economy grew at by far the quickest rate on record in the third quarter of the year as it snapped back strongly from the shutdowns in the second quarter.
UK Economic News
The UK became the first Western country to start administering a vaccine for COVID-19 and, only a few weeks later, approved a second vaccine for use.
The Astrazeneca vaccine is seen as crucial because it can be distributed far easier and quicker.
However, with cases rising sharply it is thought that stronger restrictions will have to remain in place for some months.
In addition to the positive news on vaccines, the ‘Brexit’ process finally came to some conclusion.
A tariff-free, quota-free trade deal was agreed on Christmas Eve, just days before the notional deadline. Although the European Parliament has yet to formally sign off on the deal, its terms have been applied provisionally.
Unfortunately for those expecting this to end the matter entirely, the deal essentially sets up future negotiations over how the UK diverges from the ‘Single Market’ rules.
The UK economy as a whole followed the pattern of recent months during December.
The services sector, under the strain of Coronavirus restrictions, remained stagnant whilst the manufacturing sector grew strongly. Due to the importance of the services sector to the UK economy the economy as a whole was essentially flat.
The performance of the manufacturing sector was particularly eye-catching, though this was likely as a result of stockpiling before the ‘Brexit’ deadline.
Also during the month the Chancellor extended the furlough scheme until the end of April, giving an indication of for how much longer Coronavirus restrictions are expected to remain in place.
Eurozone Economic News
The European Parliament signed off on the EU’s €1.8 trillion budget proposal during the month, meaning the Eurozone will receive a significant fiscal stimulus over the next few years.
The region is already receiving significant monetary stimulus measures and during the month the Central Bank went even further.
The ECB added a further €500bn to its purchase program and actually extended it until “at least” the end of March 2022.
During November inflation across the region fell into negative territory again, the fourth time in succession that prices have fallen.
However, on a slightly more positive note, the Eurozone’s economy is thought to have broadly stabilised in December.
As with several other economies, a strong performance from the manufacturing sector was not enough to outweigh the weakness in the services sector.
Wider Economic News
After a swift recovery the Chinese manufacturing sector was surely due to slow down at some point and so it proved during December.
That said, the slow down was only marginal and the Chinese economy remains far ahead of the West in terms of its recovery from the pandemic.
Elsewhere the Japanese manufacturing sector finally stabilised after almost two years of weakness.
The final estimate of growth in the third quarter of the year was 5.3%, which was actually slightly better than some had forecast.
Also during the month the approval of the Astrazeneca vaccine was a huge positive for the Indian economy as the world’s largest vaccine manufacturer, the Serum Institute, is based in the country.
This means that 100 million doses a month could be produced for the Indian population.
Financial Markets and Corporate News
The ‘vaccine rally’ which began in November continued to some extent through December, and the beaten-down, consumer facing companies garnered more interest from investors compared to earlier in the year.
Nevertheless, the extraordinary performance of well known technology companies means that those stock markets with a high weighting to technology are still well ahead over a 6 month period.
Over the last 6 months the FTSE 100 returned 4.91%, whilst the Euro Stoxx 50 returned 10.04% and the US S&P 500 returned 20.55% (all in price terms).
The Japanese Nikkei 225 gained around 24.06% over the same period.
The broad emerging markets index rose by 28.99% in US Dollar terms.
The Investment Association (IA) UK Gilts sector returned -0.26% over 6 months, whilst the IA Sterling Corporate Bond sector returned 5.13% and the IA Sterling High Yield sector returned 9.69%.



Summary of Key News:
- The UK started administering COVID-19 vaccines early in December.
- A vaccine produced by Astrazeneca was also approved – it is much easier to distribute and store than the Pfizer jab.
- A free trade deal was agreed between the UK and EU just days before the deadline.
- In the US a vital $900 billion relief package was passed.
- Many developed economies were subdued during December as further restrictions hurt the services sector.
- The Chinese economy remains in a better position than many Western ones.
Financial Markets:
- Over 6 months the FTSE 100 returned 4.91%, the Euro Stoxx 50 returned 10.04%, and the S&P 500 returned 20.55% (all in price terms).
- The Japanese Nikkei 225 gained around 24.06% (in price terms).
- The broad emerging markets index rose by approximately 28.99% (in US$ terms).
- The IA UK Gilts sector returned -0.26% over 6 months, whilst the IA Sterling Corporate Bond sector returned 5.13%, and the IA Sterling High Yield sector returned 9.69%.
Outlook
Stock markets have evidently decided to look past the damage that further tight Coronavirus restrictions will have on businesses in the first quarter of this year. Instead they are looking forward to a strong recovery beginning in Spring.
However, the emergence of new, more infectious strains of the virus emphasises that the path towards recovery is still fraught.
It is unlikely that all restrictions will fall away at a single moment but rather it will be a gradual process.
Nevertheless, at some point over the next 6 months it is more likely than not that something approaching normality will be resumed.
The question will then become what form the recovery will take. It is still highly uncertain what the long term impact of the pandemic on the economy will be. It may be that some consumer habits have now permanently changed and unemployment will remain higher for longer.
There are, therefore, two broad scenarios for the recovery; we could see a sharp rebound followed by consistent ‘catch-up’ towards the pre-pandemic level, or we could see a sharp rebound followed by weaker than expected growth.
This will go a long way to answering whether the ‘old world’ services companies, so badly hit during the last year, are hugely undervalued or will never recover completely.
If the recovery is faster and stronger than expected then there remains the added risk of a period of inflation as a result of the huge monetary and fiscal stimulus measures in place.