Now we’ve wrapped up an unusual 2020, what does 2021 have in store for investors and global markets?
Reflecting on the year that was, markets and economic data went from one extreme to the other. The S&P 500 registered a low of 2 237.4 on 23 March 2020 and ended off the year on a record high of 3 756.1 – a 67.9% gain from trough to peak and a 70.2% increase on a total return basis. Heading into the new year, we are cautiously constructive on the outlook for broader equity markets, despite valuations appearing to be somewhat stretched.
The unwinding of precautionary savings and relatively contained household indebtedness in many economies will likely be the catalyst for both earnings and economic growth this year. In fact, according to latest data from the Bureau of Economic Analysis, United States (US) personal savings rates as a proportion of disposable income most recently came in at 12.9% at the end of November 2020. While consumers have been drawing down on their savings more recently, the latest reading out of the US is still well above the 7.2% recorded at the end of 2019 (prior to the implementation of lockdown measures). High savings rates have been a relatively ubiquitous theme in many large economies around the world. Accordingly, we expect these high savings rates to unwind and support consumption expenditure in the new year as the vaccine roll out discourages a further build-up in precautionary savings.
Monetary support will likely continue
Monetary policy is also expected to be relatively accommodative in the first quarter of the new year. In fact, the US Federal Reserve recently opted to increase its quantitative easing programme by raising purchases of Treasuries by US$80 billion per month and agency mortgage-backed securities by US$40 billion until significant headway is made in reducing unemployment and bringing inflation closer to the 2% target.
The Bank of England, the European Central Bank and the Bank of Japan, among others, have already acted in a similar fashion. The unprecedented low cost of borrowing artificially created by global central banks, combined with the resumption and/or initiation of investment plans in a post COVID-19 world, will likely provide auxiliary support to overall growth prospects.
According to the latest Bloomberg polls, the US and China - the world’s two largest economies - are expected to increase investment by 7.5% and 7.4% in 2021 respectively1. These projections more than offset last year’s investment outcome, currently estimated to be -6% and 3% for each economy. Conversely, however, the fiscal impulse from many economies around the world is unlikely to be as supportive heading into 2021. Unprecedented support was likely front-loaded to cushion the blow for many labour market participants and businesses last year. However, in the US, the Democratic Party has gained control of both the Senate and the House; hence fiscal stimulus is still expected to be largely accommodative under the Biden administration.
An eye to the UK
It is worth noting that negotiations around the outcome of Brexit and the resultant impact on the United Kingdom (UK) economy finally came to a close at the end of last year. While free trade of goods remains intact between the UK and the European Union (EU), there will be some restrictions on services. Similarly, new rules will be applied to the movement of labour in each respective region. While this compromised deal will almost certainly lower potential growth rates in both regions, it does provide us with a more transparent, and likely less volatile platform to invest, based on our fundamental analyses.
Despite the inauguration of certain restrictions between the EU and UK, both regions are expected to have a much better year due to particularly weak 2020 growth outcomes (currently estimated at -7.4% and -11.3% respectively according to Bloomberg polls) and as lockdown restrictions are eased. The speed of the recovery will almost certainly be dependent on the swiftness of the latter.
Developed vs emerging markets
At the time of writing, we remain constructive on emerging markets amid potentially high growth rates in corporate earnings and an inverse correlation with the US dollar. We continue to believe that the US dollar will depreciate as risk appetite increases, allowing for an attractive entry point into emerging markets. Relatively robust high-frequency data and contained COVID-19 cases in Asia also bolster our investment thesis at this point.
From a fixed income perspective, we believe that yield curves in many developed economies will likely remain flat or gradually rise, thereby diminishing the capital gain return in bonds as economic growth and inflation accelerate; hence our underweight position at this stage. We do, however, believe that many central banks will continue to intervene in the bond market and suppress the pace of yield curve steepening in many of these developed economies.
Overall, we assess the risks to our cautiously optimistic view as roughly balanced. A delay in the roll out of the vaccine, renewed lockdown measures, inefficient capital allocation and slack in the labour market are among some of the key risks to our outlook at this stage. Nevertheless, we look forward to the year ahead and will continue to employ our best efforts to preserve the invested capital in the Ashburton Investments fund range while producing above benchmark returns.
1 US investment refers to private investment. China investment refers to fixed asset investment.