At loggerheads: Post-Brexit trade deal talks hit a snag

On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Head of Portfolio & Business Consulting Sophie Antal Gilbert discussed the latest developments surrounding Brexit trade talks and U.S. fiscal stimulus efforts. They also provided an update on trends in market leadership, including the recent outperformance of value stocks relative to growth stocks.

What are the key issues holding up a UK-EU trade deal?

Brexit negotiations over a trade deal between the UK and the European Union appear to be at loggerheads, Ristuben said, noting that Prime Minister Boris Johnson recently stated there’s a strong possibility the two sides won’t reach an agreement by the Dec. 31 deadline. A number of sticking points are derailing the prospects for a trade deal at the moment, Ristuben explained, including the border situation with Northern Ireland, fishing rights and competition rules. 

The stalemate led to some weakness in European markets the week of Dec. 7, he noted, with the STOXX® Europe 600 Index finishing the week down roughly 80 basis points, as of mid-morning Pacific time on Dec. 11. Interestingly enough, over the same timeframe, the FTSE 100 Index was essentially flat, Ristuben added.

The trade talks hit a snag at the same time the UK began its COVID-19 vaccination campaign, he observed, moving the nation one step closer to a broader reopening of its economy. “The UK is expected to report an 11% contraction in 2020 GDP (gross domestic product). With vaccinations underway, it’s very clear that the country will experience a rebound from this decline in 2021—regardless of whether there’s a post-Brexit trade deal or not,” Ristuben remarked.

The lack of a trade agreement would still lead to a reasonably sized hit to the nation’s GDP, he explained, but such a hit may be masked by the overall economic recovery expected in the UK due to widespread vaccinations in 2021. “This is no doubt part of the political calculus of Johnson and his cabinet as the UK inches closer to the trade-deal deadline,” Ristuben said, adding that the two sides have promised to continue negotiations in the days ahead. 

Is another U.S. COVID-19 relief package in sight?

Turning to discussions over an additional coronavirus relief bill in the U.S., Ristuben noted that Republican and Democratic leaders in Congress have generally coalesced around a $908 billion fiscal-stimulus package. However, the two sides remain at odds over a few key issues, such as COVID-19-related liability for corporations and aid to state and local governments.

“While I don’t think the lack of additional stimulus will meaningfully prevent the economic recovery from continuing—given that the U.S. is close to embarking on a widespread vaccination campaign—the failure to pass another stimulus package will certainly mitigate the robustness of the recovery,” Ristuben stated. “Without additional relief, economic damage to businesses and individuals will likely continue, due to the latest government-imposed containment measures.”

What’s powering the rally in value stocks?

Shifting to recent equity-market performance, Ristuben noted that global equities have been performing exceptionally well ever since Nov. 9—the date when drugmakers Pfizer and BioNTech reported that their experimental COVID-19 vaccine had an efficacy rate of approximately 95%. Stocks were further boosted by Moderna’s announcement a week later that its vaccine candidate had a similar efficacy rate, he said, noting that the strength in equity markets has continued ever since.

“Since the second week of November, markets have been driven by the reopening trade narrative—in other words, the belief that the broader reopening of the economy will benefit in particular those companies that have been hurt the most by lockdown measures, such as businesses in travel, leisure, dining and other cyclical sectors,” Ristuben explained.

Make no mistake, market leadership in 2020 has been dominated by the U.S. mega cap tech sector, he said, with growth stocks easily outperforming value stocks on a year-to-date basis. But since Nov. 9, a signification rotation toward value has been underway, with the Russell 1000® Value Index outperforming the Russell 1000® Growth Index by 8.7%, Ristuben said. “A nearly 9% outperformance in a spate of just five weeks is a fair amount of dominance,” he remarked.

In addition, U.S. small cap stocks have been beating U.S. large cap stocks by nearly 7% since that date, as measured by the Russell 2000® Index versus the Russell 1000® Index, Ristuben noted, while non-U.S. equities have outpaced U.S. equities.

“In general, market leadership is rotating away from the extraordinarily expensive mega cap tech stocks—and in a meaningful way,” he stated. This aligns with Russell Investments’ recently released 2021 Global Market Outlook, which projects that the rotation toward value stocks and non-U.S. stocks will continue well into the new year, Ristuben concluded.

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