2021 Investment Outlook
Happy New Year to all of you! Financial markets really reflected what a crazy year 2020 was. One of the sharpest market falls in history was followed by a stark turnaround as monetary and fiscal policy was deployed – but that market bounce was far from broad-based. As we enter 2021, thoughts are increasingly turning to the potential economic recovery, but there remain plenty of challenges to overcome before that, and the consequences of a return to economic growth are not straightforward.
A review of a tumultuous 2020
The investment landscape in 2020 has been dominated by the COVID-19 virus, lockdowns and unprecedented policy easing by Central Banks and governments around the globe. The US election and UK-EU negotiations provided further risks to markets. The pandemic led to a global economic shock that established new multi-generational records. For instance, UK GDP fell by over 11% in 2020, the biggest decline since the Great Frost of 17091.
In financial markets2, the MSCI All Country World equity index fell 32% in total return terms (including dividends) once COVID-19 new cases spread outside China, while government bonds outperformed as investors became more risk averse. The low point came on the 23 March prompting the Fed to say that it was prepared to buy US corporate bonds as part of a new round of quantitative easing (e.g. asset purchases). Global equities then went on to rally 63% from the trough, supported by – at various points – fiscal and monetary stimulus, economic recovery and hopes of a successful vaccine rollout, to close out the year up 15%.
The main winners of 2020 were ‘growth’ equities and direct COVID beneficiaries such as Big Tech, following widespread adoption of e-commerce and working from home practices. Long-term government bonds benefited from central bank asset purchases. In turn, gold gained from concerns about the debasement of the fiat currency system from money printing: the US created 21% more dollars in 2020 than existed previously. Despite the virus originating in Wuhan, China was one of the quickest economies to re-open and MSCI China equities rose 28%. China’s economy benefitted from lockdowns in the West, since services were restricted, but buying goods was not. China even managed to boost its share of global merchandise exports, driven by stimulus in the West creating demand. The biggest losing sectors were energy (-32%), real estate (-9%) and banks (-11%), with the COVID-exposed UK and Eurozone the laggards in geographical terms.
Reasons to be optimistic in 2021
We maintain an optimistic outlook for equities for several reasons. First, the rollout of vaccines and a gradual opening up of economies from lockdowns should encourage households to run down savings rates to sustain consumption.
Second, we expect a synchronised broad-based global economic recovery that supports company earnings. The IMF forecasts that a record 79% of nearly 200 economies will experience growth higher than 3%3 this year. Not only would this recover much of the lost output last year, but it adds support to consensus global Earnings per Share growth of 28% expected in 2021.
1 UK Government, Spending review 2020, 15/12/20
2 Market data sources Refinitiv to 30/12/20, unless otherwise stated
3 World Economic Outlook, IMF, October 2020
Third, central bank liquidity is still projected to remain highly accommodative. The ECB topped up its pandemic emergency purchase program by €500bn in December to €1,850bn and extended the horizon of net bond purchases to the end of March 20224. In a major policy change in September, the Fed made clear that it intended to “run hot” with regards to maintaining easy monetary policy in order to achieve above 2% inflation5. Morgan Stanley forecasts that the combined balance sheet of G4 central bank assets will rise by $3.4trn by the end of 20216.
The UK and Brexit
Despite the widespread recovery in global risk assets, all UK equity indices were laggards, handicapped by the ongoing Brexit uncertainties and a compositional skew towards value orientated economically sensitive businesses. Should current assumptions over a vaccine inspired economic rebound prove correct, it seems probable that this skew, allied to the removal of Brexit trade uncertainties, could give rise to some relative recovery in UK equity valuations. However, with the longer term balance sheet impact of the Covid lockdowns still to be fully understood, remaining focused on the fundamental quality of the businesses selected, even in an ostensibly cheap market remains paramount.
Risks to the outlook
In terms of the risks, we continue to monitor: i) a sudden removal of accommodative policy, perhaps if inflation returns at a pace that exceeds central bankers’ expectations, ii) fears of another COVID-19 surge, or a disappointment in the effectiveness in vaccines/a mutation to a more virulent virus, iii) social unrest in the politically-polarised United States, and iv) extended valuations in some sectors triggering a broader market rout.
4 European Central Bank, Monetary Policy Decisions, 10/12/20
5 Federal Reserve, FOMC Statement, 16 September 2020
6 Morgan Stanley, 2021 Global Macro Strategy Outlook, Back to Life, Back to Liquidity, 21/11/20
Important information
This document is solely for information purposes and is not intended to be, and should not be construed as investment advice. Whilst considerable care has been taken to ensure the information contained within this commentary is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information. The opinions expressed are made in good faith, but are subject to change without notice.
You should always remember that the value of investments can go down as well as up and you can get back less than you originally invested. Past performance is not an indication of future performance.
Issued by Tilney Investment Management Services Limited, which is authorised and regulated by the Financial Conduct Authority. Financial services are provided by Tilney Investment Management Services Limited and other companies in the Tilney Group, further details of which are available at www.tilney.co.uk. © Tilney Group Ltd 2021