2020 is a year that will go down in history as one defined by extreme market volatility. As we begin to make strides towards an economic and social recovery, we look at the key drivers for financial markets in 2021.
Your Money: Outlook for 2021
With vaccines on the horizon, one of the easiest predictions is that 2021 will be better on many fronts than 2020, not just for our personal health and wellbeing, but for businesses, jobs, and the overall economy, this is simply because 2020 was such a disastrous year. A year that we will all remember for some reason, whether that’s because we lost a loved one, a job, a business or the stress of being couped up indoors and not socialising. For some it may be the happier things that lockdown has given us such as spending more time with the family, discovering the outdoors in the brilliant spring weather or even having the pleasure of working from home in our pyjamas.
At the time of writing, we in the UK are approaching the end of the latest lockdown with the expectation that enough has been done to avoid cancelling Christmas. There is also the hope that the various vaccines that have been announced by the likes of Pfizer, AstraZeneca and others, will begin to be injected into the population by the end of the year and that enough people will have received dosages by the spring that there is no further need of anymore lockdowns.
That’s the good news to look forward to, but for 2020 the damage is already done. We have seen the biggest ever quarterly plunge in economic activity in most of our lifetimes, and the subsequent biggest rebound in activity in the third quarter is not enough to leave major economies someway short of the pre-pandemic levels, and we are yet to see the impact of the latest set of Autumn lockdowns in certain countries. For the year as a whole, the global economy is expected to contract by around 4%, with the UK around a whopping 10-11% partly thanks to its larger services and hospitality sector.
Even though we have vaccines coming along, I expect that Covid and its lingering impact will be the dominant driver of economic growth and markets in 2021. Why? – because the other headline grabber and key risk: Trump, will not be around beyond January and dominating the headlines for the wrong reasons. While Trump takes credit for the US markets record level, he probably hasn’t realised that the market is partly euphoric that the political instability and incoherent policies will come to an end on January the 20th. Markets like stability and with the Biden’s administration we will get that along with better international relations that will be much needed for leading economies to come out of this crisis together. Trump going along with the fact that Biden will not enjoy control of the senate means that tax rises and increased regulation should be limited. In short, the result of the US election has alleviated some of the risks I feared for 2021 and beyond.
With all that’s happened this year it is understandable Brexit developments have missed many people’s attention including mine. Now as the end of the transition period approaches we are increasingly talking about whether there will be a deal or no deal on a future relationship. However, since we already have a fairly hard Brexit and many arrangements have already been put in place by both sides, these negotiations and subsequent outcomes are not as profound as in the past. Where I do have a concern is that should global growth struggle I see the UK suffering disproportionately compared to other countries in the region from the logistical issues of traded goods and services.
In the chancellor’s latest spending review, his outlook for the economy as a result of key factors such as fiscal spending, piling debt, rising unemployment, public sector pay freezes and implication of eventual tax hikes couldn’t have been more bleak. These are some of the more medium to longer term factors though, but we should look forward to a rosier 2021 at least compared to 2020 as lockdowns should not in theory feature again (aside from the possibility of a spike in the spread of the disease in the new year as a result of Xmas gatherings). I expect to see a bounce and some euphoria in the first half of 2021 whilst I believe during the second half we’ll begin to reflect upon just what a mess the crisis has caused. As the Chancellor said, we are only at the start of the economic fall-out.
The consensus view for the global economy too is a rather positive bounce of around 6% led by the two biggest economies, the US and China to grow by 4-5% and 9-10% respectively. Some do also expect that there will be a better synchronised growth between the developed and emerging economies since emerging economies start off from here with lower inflation, better current account management supported by potentially weaker US dollar and the strong growth of China.
However, predicting market outcomes is far more difficult which can often dislocate from the economic reality, which I would say has been somewhat evident during this pandemic, wherein we have some stock markets (namely the US) achieving record levels even though millions are out of work and where we are expecting a raft of corporate failures. Others would argue the reason for this is that the stock market is a discounting mechanism, and I agree – the current rebound and record levels is discounting the expected surge in economic activity in the first half of 2020 due to the adrenaline shot from the upcoming vaccines. My fear is that beyond this bounce, markets will begin to price in the yet unknown damage to the global economy and future growth prospects.
This may not be the positive outlook that investors would want to hear, but that doesn’t mean opportunities disappear and investors should structure their portfolios accordingly. Currently I see good long-term value in equities. We will have further wobbles in the markets but central banks and ultra-accommodative monetary policies I believe are here to stay. In the short to medium term, fiscal policy should also be very supportive before being taken away – we will have to worry about that later. On balance, equities are the place to be.
However, within this asset class I see very good value in UK equities where we have traditionally seen great yields. Dividends here have been ravaged by the crisis but I would expect these to make a steady return. Naturally, Brexit is a concern for the UK markets, but amongst the large caps with an international exposure, they provide a natural hedge through overseas sales and currency movements. I see good value too in Europe and Japan and all three of these regions will be a strategic consideration for investors thinking of the much talked about rotation to value trade.
In terms of the US, I cannot predict if or when the tech bubble will burst for which this sector has been the key to the record stock market levels. However, I would certainly consider current valuations high and on balance would prefer to underweight my exposure. Let's not forget that the next president will not judge his success by how high the stock market is. US companies still will be the leaders of innovation of various forms so I think being selective is more appropriate than gathering overall market exposure.
Finally, 2020 has been a transformational year for ESG investing, if it wasn’t already on investors minds then the events of this year and promotional activity of these products will almost certainly have done so especially amongst younger investors. The crisis has made us think more about our planet and societal needs, it has transformed our every-day lives I think for the better, we don’t have to physically travel to work and burn CO2 in the process and more of us see the electrification of transport as a viable option with the technologies rapidly advancing. I would expect businesses that capture these trends and the investment products that follow them to have another rewarding year.
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