2020 was an exceptional year by any historic measure. Consider this list:
- The COVID-19 global pandemic, and attendant health care crisis and tragic loss of life
- A 20% dip in UK GDP during the second quarter of the year
- Trillions of dollars in government and central bank monetary support for companies and individuals
- Oil prices trading at -$37
- Historically huge market falls followed within weeks by similarly exceptional recoveries
Any single one of these would be considered extraordinary; a year that brought them all is unprecedented in the working life of nearly any investor that logged on to their work laptop (probably from home, in the latter part of the year at least) each morning as events unfolded.
No going back to how things were
2021 will see a gradual return to more normal conditions, but it’s not going to be a simple matter of everyone getting back on the train, heading back into the office and going back to how it was before.
Firstly, the recovery will see the occasional crisis of confidence – we shouldn’t assume a straight one-way trajectory of either the retreat of COVID-19 or business and consumer confidence. The re-imposition of lockdown conditions in the UK in the early weeks of 2021, for example, demonstrates that the pandemic still has a sting in its tail. Secondly, many aspects of how we live, work and generally interact have changed for good.
Simplistic ‘back to normal’ expectations are a recipe for disappointment. The previous decade has seen disruption to many established markets and ways of living, and all this has been accelerated, rather than halted, by the COVID-19 pandemic.
We are entering an era of profound structural change driven by technological disruption, COVID-19, innovations in health care, climate change, growing awareness of responsible investing imperatives and the investment implications of rising geopolitical tensions.
A brighter world on the horizon
All that said, there can be no doubt that 2021 will be a better year for economies than 2020. While, the pandemic isn’t over, the new year should see economic growth continue to recover, the impact of the virus become more manageable and uncertainty decline.
Countries and economies will reopen after a period of shelter from the pandemic and the trend will be one of improvement. Asset prices will reflect this trend.
The strategic outlook for the next 12 to 18 months, therefore, remains positive, even if markets look stretched from a tactical standpoint in the near term. Our economic models suggest solid longer-term recovery trends. New lockdowns will delay some of the recovery into the latter parts of the year or 2022 but won’t change the overall direction of travel. Technical and macro indicators remain positive for equities and other risk assets such as credit, and the level of conviction rises as the year progresses.
There are tactical challenges to consider. Markets have priced-in a lot of the good news since November, and over the winter investors will need to work through uncertainty regarding how COVID-19 vaccinations will play out.
The positive investor sentiment that established itself in the last two months looks a bit too consensual from the contrarian standpoint that we like to take. For example, our positions in US banks and UK equity which were very contrarian for most of 2020, are now becoming consensus. It’s very likely that markets will test investors’ positive sentiment and we shouldn’t be surprised by tactical setbacks during 2021. But we think these will be corrections in a bull market.
In the US, the political landscape has altered once more with the Democratic party taking control of both houses of Congress following run-off polls in Georgia. This could see greater government spending and more fiscal support aimed at consumers, increasing inflationary pressures in the US.
Spending on infrastructure and technology to promote the move away from fossil fuels is also likely to be back on the legislative agenda, and we could see an impact on both the energy sector and companies focused in green technologies.
Overall, this outcome confirms our long-term thesis of reflation and a weaker dollar, although this is also rapidly becoming consensus and therefore vulnerable to a test during 2021.
In 2021 we expect corporate earnings to rebound significantly and become the fundamental driver of asset prices. This trend should start to become visible in the data during the first half of the year.
A positive view backed by data
Our Coutts in-house indicators are based on a combination of leading indicators and asset scores that bring together fundamental, technical and macro data. They suggest a positive outlook for equities and credit over the next 12 to 18 months.
— to www.coutts.com
