2020 has been exceptional in terms of the unprecedented global pandemic leading to a deep synchronised global recession coupled with the fastest bear and then bull market seen in decades – the latter the result of decisive early central bank intervention, followed by sizeable fiscal support.
For 2021, we are optimistic about the outlook for equities. We foresee a favourable backdrop for equity markets, as a result of ongoing loose monetary policies, a low interest rates environment, significant fiscal support, and a normalisation of economic activity once mass vaccination programs are under way and economies re-open fully.
This should lead to a significant economic and corporate profits rebound in 2021, also helped by the low base effect of a depressed 2020. The low rates environment will remain a challenge for investors seeking yield, which is an additional support for equity markets, given their attractive earnings yields compared to bond yields.
Below we outline our key predictions for 2021, looking at the macro economic environment, monetary policy, earnings and valuations. Finally, we outline the opportunities and risks we see as investors.
Outlook 2021 - Key Points
Macroeconomic outlook – certainty in recovery, uncertainty in magnitude and timing
- 2021 will be a strong recovery from 2020 which will be the most severe recessions since 1929, although shape and therefore magnitude of the recovery remains highly uncertain
- Pace of recovery dependent on speed of channelling sizeable fiscal stimuli into the real economy
- Pandemic relapse risk remains an important contributor to the shape of recovery in the first part of the year, whilst we should be seeing a strong bounce in economic activity from Q2 onwards. This is helped by the base effect but also some form of normalisation in activity once vaccination programs become more widespread
- We maintain our scenario of a gradual recovery with no return to previous activity levels until the end of 2022
- Leading indicators remain supportive, although pace of improvement could be slowing down after the initial strong improvement seen this year
- Labour market deterioration is at risk of slowing down the economic rebound potential
- Forecast risk remains high, and the economic recovery remains fragile and highly dependent on successful fiscal policies implementation
For 2021, we are optimistic about the outlook for equities.
Monetary and fiscal policies provide support – inflation is where the risk could lie
- Fiscal stimuli pledged are sizeable – equivalent to >13% of GDP on aggregate across a large part of the world. Speed of channelling the stimuli into the real economy will determine shape of the recovery
- Central banks are likely to remain accommodative, and keep rates low for a long time given the lack of inflationary pressures, growing debt burden and the underlying deterioration in the labour market
- Inflation could be an important focal point in 2021, and could be a source of bull-bear debate
- We continue to expect a lack of sustained pick up in inflation given the strong underlying deflationary trends coming from technological developments and ongoing disruption risks
Earnings growth in 2021 should show strong growth as recovery comes through
- Whilst the worst is likely behind us, the earnings momentum outlook is still uncertain from here, as a result of the uncertain shape of economic recovery
- Corporate earnings growth is likely to be strong in 2021E, with current consensus estimates pointing to a +23% YoY growth in MSCI World, helped by the base effect and normalising activity. Our own top down earnings estimates forecast +26% YoY growth in the MSCI World
- 2021 estimates carry a high forecast risk given the lack of visibility on shape of the recovery
- Mid-term risk of higher corporate tax rates will weigh on earnings – we already capture this into our forecasts
Valuations – less supportive versus history but still supportive versus bond yields
- Equity market valuations point to the US market being extended, whilst European and Asian valuations are supportive still versus their long-term averages
- A low rate environment however is supportive for equity valuations, providing attractive earnings yields vs bond yields
- Low rates for a long time creates a challenging environment for investors, but a supportive environment for asset prices, notably equities
- Growth vs Value valuation spread remains extended, which is likely to remain a talking point for short term investors – we believe long term prospects for Growth/Quality remain strong given the low growth & low inflation prospects that we foresee
Market focus on sustainability trends will continue to increase and likely accelerate
- The pandemic crisis has brought an increased focus on sustainability and responsible corporate citizenship
- ESG focus will remain center stage, with additional regulatory developments further emphasizing the ESG approach of investors in 2021
- Climate change policies momentum to accelerate with president elect Biden likely to bring the US back into the Paris accord
- Fiscal spending to favour green initiatives in order to decarbonise economies
This should lead to a significant economic and corporate profits rebound in 2021...
Long-term opportunities across our three mega-trends and post-pandemic opportunities in green initiatives and infrastructure
- We continue to foresee support in the longer term trends across our three mega-trends: demographic change, future of technology and resource scarcity
- Infrastructure spending is likely to be an important theme, notably 5G telephony upgrades and high speed railways
- Green initiatives will be another important theme – including green energy, efficient buildings and electric transportation
- Healthcare infrastructure will be a key area of spending, in order to upgrade facilities post the pandemic crisis
- Robotics and automation is likely to accelerate post pandemic, as corporates make their production bases more efficient and if near-shoring becomes a strategic shift
- Cloud infrastructure investment will accelerate, whilst cyber security will be an important focal point
- Increased hygiene will become a permanent trend – both food hygiene, and personal and commercial hygiene, as the pandemic crisis shifts habits
2021 – a year of lower tail risks and more predictability, but the potential risk of bubbles forming
- Geopolitical risks expected to bring less volatility – US elections leading to the Biden presidency is taking tail risk out and reducing geopolitical related volatility
- Brexit remains a sizeable uncertainty as we write – probability of a disorderly exit remains high
- Successful and timely execution of fiscal stimuli critical to support the economic recovery and therefore the key source of risk to 2021 expectations
- Increased indebtedness raising the risk of lower growth beyond 2021
- Tax rates likely to be on the rise, both corporate and household tax, to fund fiscal expansion – this could be a risk that weighs on markets, although the issue could be pushed beyond 2021
- Asset price bubbles might be forming – lower rates for a long time are pushing investors into riskier asset classes, which leads to the increased risk of an asset bubble forming
- Inflation risk, should we see a sustained pick up, could lead to interest rates expectations shifting higher, which could ultimately weigh on equity markets sentiment
- Pandemic relapse risk still omnipresent – a dark case scenario would be a significant return into lock-downs as a result of pandemic relapse risk, which could be linked to a rapidly mutating virus making the newly discovered vaccines less effective. Whilst low probability as we write given what seems to be a low rate of mutation of the virus, it would be a sizeable tail risk event that would weigh on markets and sentiment.
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