2021: From Lock-down to Re-opening

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:

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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?

1. Style: As a consequence of synchronous global growth, we think we will see a shift out of the typical growth and momentum stocks that dominated the market this year, and rather into value and cyclical parts of the market. The latter will see the greatest operating leverage and earnings recovery as economic growth accelerates.
2. Regions: US has been the big winner this year driven primarily from its big tech companies such as Apple, Amazon, Microsoft, Facebook and Google. With our predictions, we think the rest of the world should play catch-up to the US next year. Particularly emerging markets (ex China which has done very well this year) and Europe. These are regions that are both under-owned and relatively cheap. Also, based in its sector composition, they have more of a cyclical bias than that of the US market.
3. Size: In a scenario with strong economic growth, small caps should do relatively well compared to large cap. Global small caps trade very cheaply compared to the rest of the market and most global fund managers have been under weighted this part of the market during 2020.
4. Sectors: With a strong rebound of economic growth, we believe the yield curve will steepen. This typically benefits Financials which has been a huge under-performer during most of 2020. We also like companies directly exposed to the economic cycle such as Capital Goods, Construction Materials and Metals & Mining. We also think the set-up for consumer cyclicals and discretionary look good as societies re-open and consumer spending picks up. Lastly, the Energy sector should see a bounce in 2021. This is one of the most beaten up sectors and is due a recovery with the pick-up in economic growth despite significant long-term headwinds. Defensive sectors such as Healthcare, Staples, Real Estate and Telecom will typically underperform in relative terms in our scenario.

Predicting the future is never easy so it always makes sense to think about the potential risk factors. After all, the virus is still very much raging in most of the Western World while many regional equity markets are actually up on the year and the market is not cheap in on historical context. First, we will monitor closely the success of the vaccine distribution and its effect in curbing the virus. This is a huge undertaking of unprecedented proportions – both in terms of size and speed. Secondly, a further boost to the equity market hinges on further sizeable fiscal stimuli – particularly in the US and in the EU. Thirdly, we would not underestimate the risk of inflation re-emerging as a topic next year after years of false starts. A little inflation is typically good for equities, but too much too fast becomes a problem.

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