Vaccination acceptance as the engine of economic recovery
Luxembourg, 26 January 2021 – Whether 2021 will be a good year on the stock market depends above all on how the pandemic progresses. “Chances are that we will find ourselves in a sustainable and synchronous economic boom”, said Carsten Gerlinger, Vice President of Moventum Asset Management S.A. “Provided that people accept the vaccination, and the pandemic will end.”
In 2021, markets will look very closely at developing case numbers, available vaccine doses and vaccination rates. “If vaccinations are accepted worldwide, nothing will stand in the way of the beginning of a new market cycle”, Gerlinger pointed out. With China already leading the way, the other major economies will follow. “Already we are noticing huge demand for goods from China”, Gerlinger added. “This gives China the opportunity to lead the entire global economy.”
Supporting the development, central banks are holding still, and governments worldwide are providing sufficient funds. “There is the obvious risk of deficit expansion, as noticeable in the US bond market in particular”, said Gerlinger. “The Fed will, however, counteract any excessive rise in yields at the long end.”
Despite the considerable increase in 2020, the outlook for equities is very good in 2021. “With the entire economy rebounding, companies are set to invest more in production facilities”, Gerlinger explained. Profits will rise as well, making valuations look a little less high. “After a recession, a higher valuation is normal, however, especially if prices atypically continue to rise so much during the recession”, Gerlinger pointed out.
Investing on the bond market will be more difficult in 2021 than in years past. “Long maturities should be avoided”, Gerlinger cautioned. Government bonds may serve as insurance against stress, but not as yield drivers. “In corporate bonds and high yields, spreads have been converging again since April 2020”, said Gerlinger: “There is not a lot of fantasy left.” Considering changes in creditworthiness, selecting the right securities will become even more important.
Rising oil prices and the European CO2 tax will draw renewed attention to inflation. “In the US, we expect inflation to rise to slightly above two per cent. Should it pick up even a little more, then the market will have doubts as to whether the Fed is actually holding still”, Gerlinger specified. “It needs mentioning that the appointment of former Fed Chair Janet Yellen as the new US Secretary of the Treasury really is a stroke of luck. With her crisis experience, she is the ideal choice at the present time.”
“Contrary to consensus opinion, we do not see sustained weakness in the US dollar”, said Gerlinger. With the exchange rate recently shaped by the interest rate differential, the dollar should move in the rather narrow range between 1.17 and 1.25 in 2021. The oil price will rise because of the economic recovery. “On the other hand, a rising price will be slowed by an immediate increase in supply”, Gerlinger added.
Politics will continue to play a role in 2021. “Perhaps not as strongly as in 2020, when the US presidential election dominated. But Germany has a super election year coming up, including a new Bundestag. Russia and Japan also hold elections and it remains to be seen whether Biden is able to govern efficiently with his thin Senate majority.”
Basically, 2021 can be summarised in three scenarios: In the worst case, the coronavirus will rage on, for example because of problems with vaccines, or the new US President Biden will continue the trade war with China. Jumping inflation would also be a major strain on capital markets. “It will be argued then that central banks want to remain very expansionary, but no longer have any funds available”, said Gerlinger. “There would be a run to safe havens on the bond markets, yields on ten-year Bunds would fall towards minus two per cent and the stock market would crash.”
In the best case, once the pandemic subsides, a new economic cycle with sustained high growth will start in all markets equally. “With central banks standing still, bond purchases will continue, and yields remain at a low level”, Gerlinger explained. “, We would then expect significantly higher prices on the stock market, especially in cyclical sectors that are making a strong recovery.”
The most likely scenario: “As vaccination progresses, a globally synchronised economic recovery will start throughout the year,” said Gerlinger. “In the bond market, yields will remain low at the short end, but pick up slightly at the long end.” As has been the case for years, equities are the only asset class for investment with expected returns.
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