2020 sharpest recession since 1945

In the investment year 2019, the global trade conflicts and the weakening economic growth were clearly in focus. The somewhat more expansive central bank policy, but also the first discussions about fiscal policy measures under the guise of the “Green New Deal” caused the stock markets to rise further at the beginning of this year and in some cases to reach new highs. But then came COVID19 – and turned the world upside down. Lockdown measures were imposed around the world and the worst recession of the post-war period and the first recession since 1945 triggered by an external shock followed. While it took a full 1.5 years after the financial crisis for politicians and central banks to stimulate the economy again, this time it took only one month. The financial markets reacted accordingly. The shock was soon followed by a consensus that central banks would pull out all the stops to ensure stability in the financial markets – even by intervening in the bond markets, for example, with the Fed buying up corporate bonds directly for the first time.

 

Vaccinations allow return to normality

With the prospect of global vaccination and a return to normality in the near future, the growth outlook for the coming year 2021 is thoroughly positive. Direct and indirect government support has prevented a massive rise in unemployment, which has had a stabilising effect on consumption – one of the mainstays of the economy. Meanwhile, the central banks are likely to continue with their loose monetary policy. With the change in strategy and the new target of average inflation targeting (AIT), they have left themselves the option of keeping interest rates low for years to come. The combination of a reopening of the economy, loose monetary policy and fiscal measures (such as infrastructure spending, etc.) will ensure encouraging growth figures in 2021. Some of these expectations seem to be priced into current equity market valuations (around 20% earnings growth), but there is still potential for surprises. This is also because the lack of alternatives in investments has never been as great as it is today. In the meantime, bonds worth more than 18 trillion US dollars are trading with a negative yield.

 

Equities preferred

Looking at the “Outlook 2021” of the various financial institutions, it quickly becomes clear that equities are the preferred asset class for the coming year. In particular, equities from emerging markets are likely to perform well compared to other regions. The dynamic growth in Asia, the weaker US dollar, but also a “normalisation” of trade relations (or no further escalations) are supportive. We also see potential in shares of small and medium-sized companies, which have only been able to close the gap on the large caps in recent weeks.

 

Be prepared for temporary setbacks

As is so often the case, however, 2021 is not likely to be a “one-way street” on the financial markets. It is important to spread the risks and position oneself for different scenarios. Because as André Kostolany said: “On the stock market, 2 times 2 is never 4, but 5 minus 1. You just have to have the nerve to endure the – minus 1.”

 

Performance financial markets 2020

Performance financial markets 2020
Source: Bloomberg Finance L.P., 31.12.2019 – 17.12.2020 in local currency

 

 

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Nicolas Peter
Head Asset Management

 

We from the Aquila blog team wish you and your families a merry and relaxing Christmas and the very best for the coming year.