The Outlook for 2021… Reasons to Cheer!
2020 was the year that the world was completely turned upside down by a Global Pandemic and there were very few reasons to be cheerful. Indeed, as I write this the USA announces the highest number of daily deaths and hospitalisations from Coronavirus as the disease seems to be spreading rapidly and overwhelming health services there. The Pandemic will leave scars that will take years to recover and as ever, the poorest people and countries have been badly hit.
However, there many are reasons for optimism for investors.
Although the stock markets had a nasty fall for three or four weeks ending around March 23rd, there has been a very strong recovery since then. The moves have been huge in Technology, Large Caps and in sectors which have benefited from the global lockdowns and trends towards working from home. On the other hand Banks, Energy Companies and sectors such as Hotels, Airlines, Leisure, Cyclicals and Industrials etc. have suffered badly. However, in general, stock market investors especially those focused on large caps, technology and the USA have done well. The markets are at all time highs as I write this.
The advance in stocks in 2020 is one thing to be cheerful about.
Another cheery factor is how smoothly the world has adopted to work from home. Organisations have been able to adjust very well as most of their staff switched to working from home almost overnight. This smooth transition is due to investments made in Technology, the Internet and the Cloud made in the previous decades.
The rise of SPACS (Special Purpose Acquisition Companies) and the “ZOOM Roadshow” ( as I write this – Airbnb has just completed a Zoom Roadshow ahead of their IPO) has reduced the time and cost of an IPO and many new exciting companies are set to enter the market.
In the first half of 2021, Mass vaccinations programmes will occur first in developed countries and then in developing countries. This will lead to a strong gradual opening of the economy.
This will be positive for the sectors which have suffered in 2020. There will be good opportunities for making money in sectors such as noted above Hotels, Airlines, Leisure, Cyclical and Industrials etc. Small caps which have underperformed for many years will offer good opportunities.
Beyond these short-term valuation adjustments there are some great long-term opportunities.
We live in a time of great disruption and change, and these trends have only been accelerated by the global coronavirus Pandemic. The disruptions have been enabled by growth of the internet, the cloud and the global spread of mobile devices. Many industries have been disrupted and transformed such as Retail, Financial, Broadcast Media, Newspapers, Entertainment Advertising, Commercial Services, Enterprise Software and so on.
These trends will only continue and accelerate, and these will offer huge opportunities for alert investors.
The next sectors which are being disrupted and will be completely transformed are Transportation, Healthcare and Medical Services and Education. New industries will be created and existing ones will be transformed. This will be driven by developments in Electric Vehicles, Alternative and Renewable Energy, Technology and Software, Artificial Intelligence, Automation, Medical devices and services, Education, Drug discovery and so on.
The speed with which vaccines have been discovered, tested approved and delivered has been unprecedented and remarkable. At the time of writing, the UK has just approved the Pfizer Vaccine and other countries will follow suit. The positive news on vaccines in November has been a huge game changer.
In general, the monetary and fiscal authorities have responded appropriately to the crisis with extensive income support programmes and accommodative monetary policies. Jobless workers in the US received generous stimulus cheques, UK workers benefited from furlough programmes while Europe’s safety nets worked well.
The Pandemic has created huge unemployment, destroyed demand and floored oil prices. This means inflation is unlikely to be an issue for at least three years. Central banks will be under little pressure to raise short term interest rates so money will be cheap for many years. Bond yields may rise and yield curves may steepen but money will be cheap.
The good news is a new generation of stock market investors has entered the market during the pandemic. The general picture is of bored millennials locked at home, deprived of sports betting, trading stocks using stimulus cheques. In part, this is undoubtedly speculative, and some will incur losses but a new generation of stock market buyers has been established.
For years, the number of listed companies has consistently declined as Corporate Takeovers, Private Equity and a slowdown of IPOs have had an impact on the number of listed companies.
Equities are likely to be the most attractive asset class for the next two or three years. We have been saying for four or five year that bond yields have been too low and bond prices have risen further and yields have fallen more. So now bonds of all kinds including High Yield and EM bonds are very expensive. Remember a bond with a 1% coupon and yield has a P/E ratio of 100 and no prospects for growth.
- There are many reasons to be cheerful for investors as they look forward to 2021
- Markets have been resilient, and stocks have advanced.
- Effective vaccines have been created remarkably quickly and mass vaccination will occur in early 2021.
- Economies will re-open and beaten-up stocks and sectors will recover.
- The pandemic speeded up changes that were already underway and these will only accelerate in the next few years.
- Bond yields and interest rates are too low and equities will be the only game in town.
Investors looking for growth have to allocate strongly to equities.
If they need access to income equity-linked structured notes generating 9% to 12% are the best bet.
Some cash should be held for liquidity and opportunistic investment, but bond holdings should be reduced.
Whatever happens in 2021, The Sun Global Investments Team look forward to guiding you through your market journey.
Best of luck!