THE UK POST-COVID

After The outbreak of Covid-19 in March 2020 has resulted in the worst human and economic devastation the world has seen for many years resulting in governments and central banks around the world, cushioning the considerable fall in economic activity by introducing fiscal and monetary support on an unprecedented scale.

 

Equity markets, which were sold off at the peak of the pandemic, initially recovered as a result of this stimulus being introduced. Then in the final quarter of 2020, with vaccines being developed and rolled out, we have seen further recovery in global equity markets.

 

The UK was one of the worst-hit developed markets in the Coronavirus crash of last year after the FTSE All Share lost 9.82 percent, compared with gains of 14.12 percent from the S&P 500 and 2.13 percent from the MSCI Europe. This was not surprising, given the services focus of the UK economy. However, while this pulled the UK down in last year’s crash, it should also help it to bounce back harder. So, we can expect a recovery this year.

 

For the UK there were two significant catalysts in the fourth quarter of 2020; the Brexit agreement signed on Christmas Eve and Pfizer announcing an available vaccine in early November. This was a trigger for investors worldwide to have confidence in the sustainability of the recovery. It can be argued that the UK market has looked cheap since the vote to leave the EU in 2016 and lacked the catalyst to realise that fair value until the agreement was signed. These two catalysts are releasing several opportunities in the UK making it investable for the first time since 2016. Many international investors have understandably, not bothered with the UK as the currency was vulnerable. They waited until we gave them confidence to invest.

 

After the decade-long bull run was halted by last year’s Covid-19 crash another reason that the UK could do particularly well in the recovery, was characterised by the out-performance of growth over value. However, increased inflation expectations (in response to the massive amounts of fiscal stimulus pumped into the economy) have led to a sudden reappraisal of value stocks

 

As we enter the second quarter of 2021 and hopefully look to a new period post-pandemic with the UK equity market back on investor’s radars, the UK could do particularly well in the recovery.

 

Stephen Lovelock

Further Reading