January 2021
INVESTMENT MARKET UPDATE
UK economy back above pre-Covid levels
We hope, as ever, you find our updates useful and informative. Our thanks to our partners at Charles Stanley for their help in pulling the content together.
Britain’s output moved back above pre-pandemic levels in November, with growth better than expected. However, the spread of Omicron will be headwind to GDP growth figures in December. Nevertheless, the UK blue chip index is now closing in on its January 2020 peak before the pandemic struck of around 7,700.
COVID 19
The Omicron variant continues to spread rapidly. The US reported the largest number of daily infections of Covid-19 since the pandemic began last Monday, 1.35 million. The previous record was 1.03 million cases on 3 January. A large number of cases are reported each Monday due to many states not reporting over the weekend. The seven-day average for new cases has tripled in two weeks to more than 700,000 new infections each day. The number of hospitalisations and deaths both jumped by more than a third in a week, but likely due to the Delta variant, not Omicron, according to Rochelle Walensky, head of the US Centers for Disease Control and Prevention (CDC).
The Omicron surge is threatening the Australian recovery as it too reported record infection rates. This week, the country’s total number of cases since the pandemic began surpassed one million, with more than half of these reported in the previous week. Aggressive lockdowns and tough border controls kept a lid on infections earlier in the pandemic, but Australia is now battling record infections in its effort to live with the virus after higher vaccination rates. Labour shortages and caution about being in public places have stifled household spending, banking group ANZ said in a research note, with spending in early January resembling lockdown conditions in Sydney and Melbourne. However, there are hopes that the number of cases could now start to plateau.
The European Union's drug regulator expressed doubts about the need for a fourth booster dose of a Covid-19 vaccine and said there is currently no data to support this approach.
The US Supreme Court blocked President Joe Biden's Covid-19 vaccination-or-testing mandate for large businesses – a policy the conservative justices deemed an improper imposition on the lives and health of many Americans - but endorsed a separate federal vaccine requirement for healthcare facilities.
The travel industry will not recover for years, according to the boss of Heathrow Airport. At least 600,000 passengers cancelled to fly from Heathrow last month as tougher travel restrictions were introduced to deal with the Omicron variant. Heathrow chief executive John Holland-Kaye said this underlined the crisis in the industry and the uncertainty facing travellers. “There are currently travel restrictions, such as testing, on all Heathrow routes – the aviation industry will only fully recover when these are all lifted and there is no risk that they will be reimposed at short notice, a situation which is likely to be years away,” Mr Holland-Kaye said. A return to normal "could be years away", he warned, as he revealed passenger numbers at Britain’s busiest airport fell to a 50-year low in 2021.
ECONOMICS
Official data showed that prices in the US were rising at their fastest rate in almost 40 years, with inflation up 7% year-on-year in December. This brought the US central bank’s next move into sharp focus.
During a Senate confirmation hearing, Federal Reserve Chair Jerome Powell said that high inflation was a threat to the central bank’s employment goals but pledged to take steps to prevent America’s high inflation becoming entrenched. Mr Powell told the Banking Committee that rates were likely to rise this year, and that the Fed could start to run down its balance sheet in 2022 as well. Mr Powell also predicted that Omicron would only have a short-term impact on the US economy and labour market.
Fed Governor Lael Brainard became the latest and most senior US central banker to signal that rates will rise in March. She noted that the Fed "has projected several rate hikes over the course of the year".
Goldman Sachs said it now expects the Federal Reserve to raise rates four times this year, one more than it previously forecast. The increase in hawkishness by the investment bank comes amid rising inflation and a tightening job market. Along with the rate increases, Goldman Sachs said it sees the Fed shrinking its bond holdings soon – a discussion about which the Federal Open Market Committee held at its December meeting.
In November, the UK surpassed its pre-Covid levels for the first time. Gross domestic product (GDP) expanded by 0.9% between October and November. That was higher than economists' forecasts and meant the economy was 0.7% larger than in February 2020. However, growth is likely to have slowed in December due to measures introduced to control the spread of Omicron.
Soaring energy prices have been a major part of the recent increase in the cost of living – and the chief executive of British-Gas-owner Centrica does not see the situation easing in the short term. Chris O'Shea thinks high prices could last up to two years, and there was "no reason" to expect gas prices would come down "any time soon". Mr O’Shea said hopes that average bills rising by more than 50% to about £2,000 a year would be short-lived may be “misplaced”.
GEOPOLITICS
After a week of talks between the US and Russia over increasing tension on the Ukraine border, little progress appears to have been made. Moscow said the dialogue had hit a “dead end”.
The Biden administration imposed its first sanctions in relation to North Korea's weapons programs, following a series of missile launches by the dictatorship. The sanctions targeted six North Koreans, one Russian and a Russian company that the US said had procured goods for the programmes from Russia and China.
RETAIL
The main trade body for Britain’s retailers said the soaring cost of living risks dragging down high street sales in 2022 – after a bumper Christmas trading period and year of recovery in consumer spending. The British Retail Consortium said there were significant headwinds for the industry in 2022 from high inflation, rising energy bills and planned tax increases.
J Sainsbury, Britain's second-largest supermarket raised its full-year profit guidance to "at least" £720m before tax, up from £660m. Customers spent more on treats, as well as record amounts on champagne and sparkling wine for festivities and grocery sales rose 0.1% in the six weeks to 8 January, year-on-year.
Marks & Spencer also raised its full-year profit guidance slightly following strong Christmas trading. Food sales increased 12.4% compared with its pre-pandemic performance two years ago in the 13 weeks to 1 January, beating market forecasts of 10% growth. Clothing and home sales rose 3.2% on the same basis – the market had expected a 0.9% fall.
Currys’ management slightly reduced its full-year profit guidance after what it called a “challenging” technology market at Christmas. The group reported a 4% rise in UK and Ireland like-for-like sales over Christmas, but the overall UK tech market was down 10% compared with Christmas 2020 and supply-chain issues caused shortages of some products. The company was upbeat on future technology, noting that 2021 was "the year that virtual reality broke into the mainstream".
The pandemic has hit profit margins at online fashion group Asos in its latest quarter, as supply-chain costs soared. The fast-fashion retailer needed to fly-in clothes to manage these delays and sold more products at a discount, as competition rose. However, management said it would move its listing to the main market from Aim next month, which supported the shares.