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With the advent of 2021, investors seem to be facing many of the old problems from 2020 Surging Covid-19 infections and fatalities, large numbers of unemployed, lingering concerns about the pace of economic recovery, political gridlock and a slow vaccine distribution rollout.
The pandemic took a turn for the worse over the holiday period. New infection rates rose significantly in Europe and the US, topping the previous highs and forcing governments to implement new stringent lockdown measures to slow the spread of the dreaded virus.
As seen through 2020, the manufacturing sector continues to show more resilience to the pandemic than the services sector, a trend which has been observed globally. Recovering demand for goods and lower sensitivity to social distancing, helped to keep manufacturing Purchasing Managers’ Indices (PMIs) in expansionary territory. Yet, the reopening of economies and the availability of vaccines will gradually unleash a new wave of spending on travel and services. After a 4.2% decline in 2020, global world GDP is projected to increase about 4.6% in 2021
Major themes in focus for 2021
1. End to COVID crisis now appears in sight
An end to the Covid-19 crisis now appears to be in sight, but the path to recovery may still be bumpy over the coming quarters. After various vaccines gained approval by the relevant authorities, the rapidity of manufacturing and distribution logistics will be key to revert to normality sooner rather than later.
2. Monetary measures effects on Fixed Income
On the monetary policy front, the European Central Bank (ECB) expanded its unprecedented Quantitative Easing Programme by increasing the size of its planned asset purchases by another €500 billion to €1,850 billion. Moreover, it extended the horizon of the Programme by nine months to the end of March 2022. This has kept major bond yields at record lows going into the new year, despite the expected large amount of gross government bond supply to support their respective pandemic relief programmes. Lastly, the ECB asked banks to limit dividend payments until September 2021 to ensure the stability of the financial system.
The key takeaway for bond investors is that, despite market hopes of an economic recovery, government bond yields moved modestly higher due to the unwavered support by the major central banks Rates and yields are likely to remain low for even longer.
In the US, the last week of the year pushed the 10-year US Treasury to the 100 basis point level.Nevertheless, markets are expecting the 10-year US Treasury to settle at close to the February 2020 levels. Yields are expected to remain lower for longer due to loose monetary and fiscal policies. Moreover, although US corporates look expensive at such levels, the commitment by the FED to extend its measures should support the present spreads over H1 2021.
3. Slow pick-up in inflation
The vaccine rollout in the first half of the year should result in a robust recovery in H2 2021 bearing the risk of a return of inflation.
As the pandemic ends, some prices that had been depressed will start to reassert themselves.Rentals, airfares and hotel rates are but a few examples. Despite the fact that inflation is not expected to force the hand of policy makers, Consumer Prices Indices are pricing in much pessimism.
4. Shift to cyclical areas
In any rotation from winners to losers in markets, it will be important to discriminate between cyclical and secular headwinds and tailwinds. With investors betting on an economic expansion, the 2021 stock market forecast includes an expected shift in market leadership. Cyclical and value stocks are widely forecasted to outperform as the economy thaws out from coronavirus restrictions.
Sectors that are expected to rise with an ebb in coronavirus cases include the Consumer Discretionary sector (particularly travel, restaurants and retail), the Energy Sector and the Financial Sector. Looking at the Consumer Discretionary sector, markets will be keen to hear from the major CEOs during earnings season as consumer behaviour has shifted online during the onset of thepandemic. This behaviour is expected to have permanent consequences as major retailers focus on building an efficient online infrastructure to meet the demand of their respective customers.
5. Green projects
One of the few positives of the pandemic, was the speed at which the usually bureaucratic European Union acted. The European Union main achievements were the EU Recovery Programme and the European Green Deal. These should pave the way for a EUR 1.8 trillion financial support package. It was agreed that a significant proportion of the budget and recovery fund is to be spent on sustainable and green projects. The EU also agreed on tougher climate goals for 2030, by increasing the reduction in carbon emissions it is targeting vs. 1990 levels from 40% to 55% by 2030. This will lead to significantly higher investment in renewable energy and more regulation.
Moreover, Biden’s victory in the US should further boost Green Energy demand. During his election campaign Biden had promised to put Climate Change in the centre of his policies.
6. Earnings Season and Valuations: A Return to Fundamentals
The market is currently based more on optimism rather than fundamentals. For the next earnings season we will get to see how the major market drivers fared in the fourth quarter and their expectations for 2021. The surge in stock prices in December reflected optimism about the eventual stimulus bill in the US and the Covid-19 vaccine progress. The upcoming earnings season and the companies’ guidance for 2021 will prove to be the ultimate test for market sentiment yet, with the current valuations, a shift to fundamentals will remain one big risk.
7. Malta to perform economically better than European peers
The detrimental impact of the pandemic has also hit our shores, despite the local market traditionally having frontier market characteristics. With the tourism as a leading contributor to the economy, the majority of local companies operating in the industry do not forecast a return to normality before 2023. Yet Malta is still expected to over perform its peers with the ECB’s forecast for the island of 3% in 2021. Just like other major economies, the vaccine rollout and central banks support will remain crucial to the local bond and equity market.
_______________________________________________________________________________________________________________
In the meantime, as the return to normal life is very much visible on the horizon, we continue to remain cautious on downside risks such as continued uncertainty about what comes after phase one of the US-China trade deal, antitrust, privacy and tech regulations, and default rate spikes to mention but a few.
If Covid-19 defined the 2020 hopes for the stock market, the virus' lingering effects have framed the stock market forecasts for 2021. Yet, the stock market which is based on expectations and is forward looking, has shifted the hopes to optimism, as it seems to have already factored in a stronger economic recovery and the arrest of the coronavirus pandemic. This will bring opportunities to buy good quality companies within selective industries and themes that we believe can dominate throughout the year.
The writer and the Company have obtained the information contained in this document from sources they believe to be reliable but they have not independently verified the information contained herein and therefore its accuracy cannot be guaranteed. The writer and the Company make no guarantees, representations or warranties and accept no responsibility or liability as to the accuracy or completeness of the information contained in this document. They have no obligation to update, modify or amend this article or to otherwise notify a reader thereof in the event that any matter stated therein, or any opinion, projection, forecast or estimate set for the herein changes or subsequently becomes inaccurate. This document and the information contained therein should not be construed as investment advice. Investments should be based on the full details of the Offering documents and KIIDs, available from all leading financial intermediaries. BOV Asset Management Limited is licensed to conduct investment services in Malta by the Malta Financial Services Authority. Issued by BOV Asset Management Limited, registered address 58, Triq San Żakkarija, Il-Belt Valletta, VLT 1130, Malta. Tel: 2122 7311, Fax: 2275 5661, E-mail:
[email protected]
, Website: www.bovassetmanagement.com. Source: BOV Asset Management Limited.
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