A new year and time to look forward with a renewed sense of hope. As Covid-19 hits hard in some countries, vaccines are being rolled out providing light at the end of the tunnel. Investors will be watching progress closely as at the same time a new US government takes power in the form of President Joe Biden.
Winning 2 senate seats in Georgia, the power pendulum has swung in favour of Biden and the Democrats who now hold majorities in both houses. Although political gridlock & balanced government is typically preferred by US equity markets, investors have reacted positively to this outcome.
At the height of the pandemic last April, global economic output was 20% below levels it would have been otherwise. Currently, most G7 nations’ restrictions are more stringent than last spring. It is expected that as businesses and individuals adapt to these lockdown restrictions, that productivity & economic resiliency will be better than expected requiring less stimulus than was seen last year. Nonetheless, in the US, the incoming Biden administration is proposing a long-awaited US$1.9 trillion additional stimulus package.
China continues to lead the world coming out of this recession with 6.5% GDP growth in Q4 culminating in 2.3% growth for 2020, above expectations. The World Bank expects global economic output of 4% in 2021. This optimistic scenario is dependent on the large-scale deployment of the vaccine solutions.
Surging coronavirus cases & delays in inoculations would be expected to limit growth to a meagre 1.6%. As the Pfizer & Moderna vaccines have largely been deployed to wealthier nations, the Astrazeneca & Sinovac vaccines will be important for much of the developing world as they are more cost-effective & easier to distribute, although with slightly lower efficacy rates.
Despite relatively high valuations above pre-covid levels, the backdrop for equities remains positive as global business rebounds and the recovery accelerates during the second half of this year.
Monetary policy response is highly effective & helpful for capital markets; the Federal Reserve continues to be highly accommodative in terms of both interest rates & open market activity. Global consumer inflation continues to miss central bank targets of 2% across major economies including China, Europe, and the U.S. indicating that interest rates will be lower for longer.
Notwithstanding this pandemic shock to global economic growth, the S&P 500 finished 2020 up 16.3% (18% including dividends). More than half the return of the index was provided by just 3 major technology companies who benefit from remote work: Apple, Amazon, & Microsoft. We expect that as economic uncertainty fades, the market breadth will continue to improve across cyclical sectors that have lagged such as energy, financials, travel, industrials, & materials. The first quarter of 2021 will be challenging but sunny skies are expected to return in the remaining quarters in the form of strong economic growth.