Sunil Krishnan highlights some of the themes that will shape multi-asset investing in 2021.
1. Better than expected progress on COVID-19 vaccines is consequential, not necessarily in the next three to six months but longer term. It allows investors and companies to see light at the end of the tunnel and feeds into expectations of a recovery in 2021.
The efficacy of the Pfizer and Moderna vaccines is higher than anticipated, which should reduce the number of infections among recipients and accelerate herd immunity, speeding up the recovery. Having more than one drug with a high efficacy rate is another positive surprise.
Companies thinking about investments for the medium term can have more confidence in the state of global demand for 2022 and beyond
This feeds into upgraded expectations for an economic revival. Households may feel more confident spending additional savings built up during the pandemic. On the corporate side, even if there is a difficult period ahead, companies thinking about investments for the medium term can have more confidence in the state of global demand for 2022 and beyond.
For governments, it will be easier to frontload fiscal support to bridge the difficult winter period, as the same scale of emergency measures is unlikely to be needed next year. That will multiply the support fiscal policy can provide if governments have the will – though there may be obstacles if power is shared between the parties in the US, or as philosophical differences emerge among Conservatives in the UK.
Still, this overall picture is supportive for risk assets generally, across a range of companies, regions and industries. We do expect volatility, from near-term news on other vaccines, positive or negative, but also from the current period of pandemic management we have to get through. Restrictions are probably at their peak in Europe but are likely on the way up in the US, which will draw attention.
2. A divided US administration makes significant fiscal measures less likely. While a Biden government will take a more measured approach to China, we expect continued friction as both countries work to establish distinct spheres of influence.
With the US Senate currently expected to remain in Republican hands, we are unlikely to see a strong spirit of cooperation in Washington, reining in investor expectations for new pandemic support measures and any large-scale tax reform.
The decoupling between the US and China is unlikely to reverse materially
Internationally, the US may take a more measured approach than in the Trump years, but the decoupling between the US and China is unlikely to reverse materially. The rivalry will grind on as both countries establish their spheres of influence, at times creating uncertainty for investors.
While this will be slow moving, it will gradually provide more diversification between emerging and developed markets. A greater share of emerging markets will be driven by an independent Chinese economic pole and demand there, as opposed to a proxy of US demand going through global trade. Investors need to start thinking about China as a genuinely independent economic engine.
3. Central banks have changed how they think about inflation. The question for 2021 is whether they can stick to their commitment to more reflationary policies in the face of a strong recovery, or if they are drawn back into economic orthodoxy.
The US Federal Reserve is not alone in rethinking its goals; but its 2020 framework review significantly changed how the bank defines and achieves price stability, for the first time targeting temporary overshoots of the two per cent inflation objective. This is a significant evolution with broad reflationary implications, which over time may lead to steeper yield curves and supportive conditions for risky assets like equities. Currency markets may also feel the ripples: central banks making the most radical changes will potentially drive their currencies lower, and the US review could fall into this category.
Can central banks stick to this commitment if unemployment rates come down?
A key question we expect an answer to in 2021 is whether central banks can stick to this commitment if unemployment rates come down, allowing economies to run a little hot before they consider tightening. They understand the issues of having undershot inflation targets so much in recent years, but if they do stick to their commitment it will be an important change for investors’ long-term investment strategies, not just their tactical positioning.
4. In the UK, monetary policy will likely ease further amid COVID and Brexit headwinds, limiting potential rises in Gilt yields and sterling. Later in the year, however, a weaker currency and the vaccine rollouts could benefit FTSE 100 companies.
Our central case is for a “skinny” Brexit deal to be agreed between the UK and EU before the end of 2020. However, this does not mean it is plain sailing for the UK. The combination of a winter of tough COVID restrictions, and major post-Brexit adjustments for several sectors, are likely to create headwinds for the economy early in 2021.
The result could be a revival for the UK’s largest companies
Monetary policy is likely to ease further, though the Bank of England’s Monetary Policy Committee appears split on whether further bond purchases will prove sufficient. The debate over negative interest rates is likely to remain live into the spring, limiting rises in Gilt yields. Against this backdrop, recent gains in sterling may also prove hard to sustain. This may, interestingly, provide some support for the FTSE 100, which tends to benefit from translating overseas earnings when the pound is weak. When coupled with inexpensive valuations after many years of lagging returns seen overseas, the result could be a revival for the UK’s largest companies.
Looking further ahead, the UK could be a prime beneficiary of vaccine rollouts, given the high share of services spending in the economy and significant recent investment in vaccination infrastructure. It may be that the end of 2021 brings light at the end of the tunnel for the UK economy and currency.