Originally published on brewin.co.uk. Brewin Dolphin is an investment management partner of Wren Sterling
As 2020 closes, Guy Foster, Brewin Dolphin’s Head of Research, focuses on what may lie ahead for the world economy and investors in 2021, with expectations of a sustained recovery on the horizon.
Back in January, Covid-19 was a regional virus, and few predicted that it would be the cause of an unprecedented and extremely challenging 2020 for people, businesses and economies. The crisis has also been a tumultuous experience for investors as it forced the global economy into its deepest recession in peace time.
The scale of market volatility was underlined by the Dow Jones Industrial Average plunging by 37% during the height of the pandemic in March, before staging a stunning recovery with a rebound of 62% in November to reach a record high. In the UK, the FTSE 100 started the year close to a record high, before falling by 25% in the three months to the end of March and then bouncing back somewhat on stimulus and news of an effective vaccine.
While last year highlighted shortcomings of forecasting, we know that over time certain combinations of characteristics can determine the likelihood of better or worse times ahead.
Looking ahead, the prospects for 2021 look brighter – offering the prospect of a return to normality, and with that greater certainty.
Brighter times ahead
There is no doubt that 2020 was a difficult year for almost everyone. The global lockdowns during the Covid-19 pandemic resulted in a deep contraction for the global economy. In the UK, we saw business closures, job losses and rising government debt. Most economies made a start getting back to normal once lockdowns were lifted before further waves of the virus brought more restrictions.
Looking ahead, the prospects for 2021 look brighter – offering the prospect of a return to normality, and with that greater certainty. Governments will remain focused over winter on containing Covid-19 outbreaks, and there are logistical challenges to tackle as the various vaccines are approved, distributed and administered. However, the greater confidence resulting from the vaccines, alongside continued technological innovation, and a recovery in global economic growth should provide a positive landscape for investors. The incoming Biden presidency also heralds a return to international co-operation and efforts to combat climate change.
As many have observed before, the pandemic has accelerated a number of pre-existing trends. Technological innovation will continue to thrive after the pandemic and we will see an era of further change to the way we work and live. Online behaviours are likely to remain, particularly with a structural shift in habits and trends with far greater numbers of people shopping online, using technology and working from home. 2021 offers the path back to normality, but with the potential to make that a new normal, incorporating features of the connected world that was forced upon us.
We’ll need that potential if we are to confront the challenges that are on the agenda for 2021. Sustainability is one area we expect to see acceleration. Despite 2020’s challenges, we saw more net zero pledges from countries this year, most importantly the world’s biggest carbon producer, China. The market volatility also didn’t diminish the pressure shareholders are applying to drive investee companies to reduce their carbon emissions.
So we look ahead to the COP26 meeting in Glasgow in November as a focal point, and we expect to see more companies announcing their own net zero targets as a result.
In summary, as we emerge from the crisis, we expect the year to be characterised by a period of sustained recovery, and growth across major equity markets. This cycle has played out plenty of times before. For example, in 2010, following the global financial crisis when investors were unsure of the sustainability of market growth we were in fact seeing the start of a long bull run.
Of course, how quickly vaccines can be rolled out, and the speed at which the world can recover from the impact of Covid-19, remains to be seen. And it is fair to question whether investors have been overly bullish. With the dramatic recovery in equity prices in November, good news is now increasingly priced in. That inevitably means there is a risk of disappointment for example, if the recovery from the crisis is slower than people have hoped. This suggests we should not discount potential volatility in the near term, but overall, we expect economies will see a boost from pent-up demand as people start to spend again, and sectors start to recover.
As we emerge from the crisis, we expect the year to be characterised by a period of sustained recovery, and growth across major equity markets.
The US
Despite events surrounding the pandemic, there has been a stark disconnect between the market and the economy. The US S&P 500 index saw one of the fastest rebounds in recent history in November, despite the ongoing pandemic, fuelled by its exposure to the technology companies that have kept the economy moving while lockdowns have loomed. The baton has now passed from the small group of technological enablers to the rest of the market as successful vaccines were announced.
Investors have also lauded the beginning of transition in the White House and the appointment of Janet Yellen as Treasury Secretary. Perceptions of Biden as a collaborative US president point towards a more predictable and constructive policy environment. The new administration will recognise the same international rivals as the outgoing president, but a more strategic approach is likely to be less damaging and more fruitful.
The US will, however, begin the year with Covid-19 infections soaring and lockdowns intensifying. Democratic success in January’s double run-off election in Georgia could also possibly upset the market-friendly power vacuum in Congress (although it is likely that Republicans will survive that test).
UK
We anticipate that 2021 will see a sustained recovery for the UK economy with a vaccine becoming available. Economic growth will be driven by the fact that there will be fewer restrictions on the economy as lockdowns cease to be such a feature of everyone’s lives.
The UK economy will be recovering well by 2022, when we expect to see the UK’s GDP return to its pre-pandemic level. However, we do not expect it to match the pre-Covid growth trends because of the long-term scarring caused by the job losses, business closures and economic impact of lockdowns during this year.
Meanwhile, with or without a Brexit trade deal, the end of the transition period should eventually provide much-needed certainty and opportunities for investors after years of stagnation following the result of the referendum.
China
The outlook for China appears positive in the run up to the 100th anniversary of the Chinese Communist Party (CCP) on July 1, 2021. In 2010, the president said the country’s GDP should be twice as large in 2021, and had the Covid-19 crisis not hit, the country would almost have reached its target.
The landmark event will rightfully be celebrated in China, and despite the country having the first confirmed case of the virus, it has arguably emerged stronger. Currently China has the edge on the rest of the world in keeping the virus under control. The stock market has benefitted from that domestic resilience and a supportive monetary and fiscal policy environment. However, there is always a political aspect to the economic cycle in China, as well as the shadow cast by high debt and leverage. Once the centenary celebrations are over, we can expect the policy agenda to turn back from recover to deleverage. That could prompt a little short-term pain to achieve the longer-term gain of more sustainable financial growth.
Generally, China is accelerating its research and development to challenge American technological hegemony, but that is side by side with the continued rise of the Chinese consumer with international tastes reflected in the respective performance of companies like Alibaba and LVMH.
We anticipate that 2021 will see a sustained recovery for the UK economy with a vaccine becoming available.
In summary
We can’t know what will happen next year, but we know what is likely. We anticipate that 2021 will see a less bumpy, sustained recovery, in which sectors affected by the pandemic will improve. There are enough positives to suggest that equities will outperform bonds and cash.
However, if 2020 has taught us anything, predicting the course of a pandemic is difficult, even for experts. While some challenges remain, we are alert to the opportunities and challenges that these present. That is why we manage diversified portfolios of asset classes and geographical regions to secure opportunities from market corrections or price shifts in particular assets and changing investment trends.
We will continue to focus on high-quality businesses that are prepared for a variety of outcomes, with robust balance sheets, strong leadership and the ability to invest for their future growth.
The value of investments can fall and you may get back less than you invested.
Neither simulated nor actual past performance are reliable indicators of future performance.
Investment values may increase or decrease as a result of currency fluctuations.
Information is provided only as an example and is not a recommendation to pursue a particular strategy.
Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.