Like for many families, 2020 was a tough year for us, but one highlight came near the end. When I took my mum for her first dose of the vaccine. The atmosphere of optimism in the vaccination center was refreshing. And the ease of the process a credit to our national health service.
Now, vaccine delivery might well be one area where the UK has outperformed other nations, but unfortunately our economy has been a perennial under-performer. Never more so than through the pandemic.
Last Wednesday's budget was the UK government's attempt to nurse us back to economic health. Now the budget did show that the UK government was taking the threats to any recovery seriously. They prescribed extraordinary levels of borrowing, extended, supportive employment policies to minimize the spike in joblessness once those policies were removed and also added the better and unpopular pill of tax hikes to reduce the effects of economic scarring.
There was also a longer-term commitment to economic and green growth, and that was typified by the Bank of England's new green and environmental agenda. There was also the issuance of the first ever green retail, sovereign bond and the plans to make London and the UK, the center for high quality voluntary carbon offset trading.
So apart from some Brexit related issues, which unfortunately are UK specific and have no cure, the budget threw up other questions which deserve answering and which are common across global economies.
Firstly, with higher and higher levels of government debt, how will that square with the ratcheting up of inflation expectations and higher bond yields? How will we get out of this?
Secondly, what's the exit trade in terms of fiscal, where will the consumers and corporates find the money to pay these tax hikes, which governments need to balance their fiscal books.
And finally, what if the recovery is weaker than expected? What if we don't get the pent up demand? What if vaccine efficacy isn't as strong as shown in the tests? What's plan B? Can we afford a second dose? Or do we have to go cold Turkey?
For me, these questions make me think that investors should be adding more downside protection now to their portfolios, as we move from fiscal stimulus to repair and recovery. With the bond market, not offering the trinity of income, return and diversification it has in the past, defensive equities make more and more sense for equity investors who need to take on less risk and for fixed income investors who need more return and an active approach makes sense with a market, which is increasingly uncertain and anxious.
Now it might be hard to inoculate a portfolio completely against risk, but I do think some downside protection can help with pain management. And as my mum, I'm sure would say, having had the second dose of the vaccine now, added protection means more peace of mind.
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