2021: From Lock-down to Re-opening
For those of us who have been working in the financial market for a while, 2020 will for sure stand out as one of those unique years that will never be forgotten. It has been a year of many human tragedies given the pandemic with loss of lives, lost jobs and isolation. As investors we look back on a year that has given us the sharpest drop in the global equity market in modern history but also one of the quickest recoveries.
We also experienced one of the biggest divergences between winners and losers that we have ever seen. This can be explained because one part of the economy pretty much shuts down while other parts of the economy have thrived. I won’t dwell much on the past, but I do think the setup is relevant for what we can expect for 2021. The bottom line is that we have a positive outlook on the equity market for next year and here are some reasons why:
- From Trump to Biden: Even though we don’t know the outcome of the US Senate runoff election in Georgia yet, we think that a Biden presidency will be positive for global equity markets. In particular, we can expect more diplomacy and bridge building than the “USA First” rhetoric from Trump. This can lead to a de-escalation of the global trade war which has been an overhang for the markets for several years. Also, with a Republican Senate (which seems like the most likely scenario at the time of writing), it will be hard for Biden to push through some of the tax hikes many had feared.
- From virus to vaccine: Given all the recent promising vaccine news, we believe that a meaningful part of the global population will be offered vaccination during 2021 which will be an important trigger for the reopening thesis.
- From recession to growth: Analysts estimate that global GDP will contract by c.a. 4% this year. For 2021 estimates range from +4% to +6%. As the economy reopens, unemployment levels will continue to fall and consumer confidence should rebound.
- From earnings collapse to earnings rebound: Consensus has earnings per share down ca 20% this year for MSCI World. We think a rebound of 30-50% in a re-opening scenario seems realistic and for many companies badly hit this year, significantly higher.
- Continued Central bank support: We believe that central bank support will extend well into 2021 which means extremely low interest rate to help the recovery and make equities an attractive asset class.
- Fiscal stimulus: As we are exiting the deepest recession in modern history, we expect to see continued aggressive fiscal support from the most important economic blocs in the world.
For the reasons above, we expect a continuation of the bull market and a further 10-15% increase for MSCI World during 2021 is realistic in our view. The market will not necessarily be driven by multiple expansion as we have seen for many sectors this year, but more driven by earnings growth helped by a strong and synchronous global rebound in economic growth. So how would this scenario play out in the markets?