Now that 2020 is behind us, everyone is ready for a fresh start. We wanted to share five reasons why 2021 may well be positive for investment markets, and why now’s a good time to get your finances in the best working order.
Repeated lockdowns during 2020 led to a sharp slowdown in economic activity and as we move into the third national lockdown, the economic uncertainty may well continue in the short term. However, with vaccines being introduced globally in 2021, we expect to see a sharp rebound in economic activity later in the year. But even if activity comes back strongly, that does not necessarily mean companies and markets will benefit. As markets tend to be forward-looking, current equity valuations already now include expectations of the ‘2021 rebound’.
Markets did surprisingly well during 2020, but much of this was due to the support offered by governments and central banks to prevent companies from going under. To make headway from here, investors will want to see that already-expected economic growth clearly translate into company profits. For us, the biggest factor that makes the equity outlook positive is central bank policy. Since government bonds should remain at historically low levels for the foreseeable future, equities have the yield advantage, which means investors will continue to favour buying stocks over bonds. Provided central bankers keep their nerve and continue to offer support (instead of withdrawing it too soon), equity markets should make forward progress, although at a slower rate than in 2020 overall.
Regardless of how you voted during the referendum back in June 2016, Brexit has become an unhealthy preoccupation over the past five years, casting a shadow over the economy and UK equity markets. Now we have finally said our goodbyes, at last, there is an end to the constant state of uncertainty that was causing so much damage to British businesses. Clarity on transition conditions will finally allow businesses to plan for the future.
Many investment analysts believe that this uncertainty has been holding British companies back and that from here, things can only get better. UK equities have been so unloved by investors in recent years that it looks hard to justify their lowly relative valuations. Even if UK growth lags behind the rest of the world, there are many good British businesses that will continue to prosper after Brexit, which could see UK stock markets do surprisingly well in 2021. That said, much will depend on the economic policies that the UK decides to pursue. The Bank of England certainly played its part during the worst of the coronavirus pandemic, by lowering interest rates and providing liquidity for markets. But Brexit means more expansionary policies will now be needed.
US investors took heart that a decisive result was determined in the election and that a smooth transition of power is now likely. Whilst some would question policy decisions made by the White House of late, action taken by the US Federal Reserve has been more decisive. As well as setting short-term interest rates at zero and keeping long-term bond rates low through extensive asset purchases, the Fed also used the tools at its disposal to offer emergency funding for companies that saw most of them through the economic shutdown. Even so, the US is by no means out of the woods, so we expect the Fed will stick with a ‘lower for longer’ policy on interest rates, and continue to commit to supportive economic policies, even as growth begins to return. We consider this to be a positive for long term US economic growth, and for investment markets on the whole.
Incoming President Joe Biden will have his work cut out, especially during the early months of his presidency. But environmental policy is one area where Biden could make a real difference, repairing international relationships and accelerating some of the investment trends (around technology, commodities, and energy) that ‘green’ policies demand.
Asian countries in general have suffered less economic damage due to the pandemic, as highlighted by China’s early and substantial return to growth. South Korea and Taiwan also handled the spread of the virus well and have been able to keep economic activity at a level considerably above the US and Europe. It was also helpful for them that both their stock markets are heavy on technology companies that did well on a global basis during lockdown. As a result, the Asia-Pacific region looks well placed to grow strongly in 2021.
Economically speaking, the ingredients are all there for continued Chinese growth. The real difficulty lies in its political relationships with the West. China faced heavy international criticism in 2020 over alleged human rights abuses in Xinjiang and the effective crushing of any democratic rule in Hong Kong. Further acts of aggression could result in sanctions from other nations, which would lead to investors being forced to pull their money out of Chinese companies. A lot will therefore depend on whether Joe Biden can form a stable working relationship with his Chinese counterpart Xi Jinping.
Elsewhere within emerging markets, Latin America, the Middle East, Africa, and the Indian sub-continent face a more complicated picture. In general, a global cyclical rebound with a weaker dollar should be viewed as positive conditions. But much depends on how well governments can continue to contain the spread of the virus, and whether they are able to provide fiscal support without drastically increasing their debt costs.
One of the biggest positives during 2020 has been the increase in popularity of environmental, social, and governance (ESG) investing. According to the Investment Association, investments made into ESG and sustainable funds quadrupled in 2020, with £7.1 billion invested in the first three quarters of the year compared with £1.9 billion last year.
As well as mounting fears around climate change, the coronavirus has also played a major role in raising awareness among investors, as well as creating a major change in corporate behaviour. Companies have had to re-assess the relationships with their customers, employees, suppliers, and the wider community, instead of just addressing the short-term needs of shareholders. Research by Bank of America Merrill Lynch shows that companies that performed well during the height of the COVID crisis demonstrated superior product, health and safety scores, as well as better workforce policy scores.
After 2020, there’s now an even stronger case to suggest sustainable investment funds offer enormous potential, not solely for the sake of ethical or environmental issues, but because of their ability to invest in companies that manage risks more effectively during times of crisis and do so while delivering more resilient returns. Doing the right thing can be (and should be) a profitable way to do business.
It’s understandable to feel apprehensive about what the year ahead might bring. Whatever happens over the coming months, the pandemic is likely to have a lasting impact on our lives and finances. So, now is a good time to reassess and make changes, such as ensuring your savings work harder and protecting the things that matter. One of our qualified financial planners will be able to talk through the options available to you, assess your attitude towards investment risk, and come up with a plan to help you achieve the best possible outcome. There’s really no better time to start than right now.
If you are interested in discussing your financial plan or investment strategy with us, please get in touch with one of our experienced financial planners here.
This content is for information purposes only. It does not constitute investment advice or financial advice.