Jan 4, 2021
Global markets – A year of two halves
As we enter 2021, it is evident that the policymakers are still very engaged in supporting the global economy. Their support will help maintain global activity at a time when we still see the impact of the virus. However, as we move into the second half, year-on-year growth will likely dip, and markets may find few catalysts for renewed enthusiasm. When economic growth has recovered, we expect governments to back off from further meaningful fiscal stimulus, and most central bankers will not be able to ease still further.
Stay with equities…. For the moment
Risk assets most notably equities can probably look forward to a good start to 2021. As the distribution of vaccines picks up in pace, economic growth should revert to something approaching normal, which will enable a sharp recovery in corporate profitability. Given the sharp recovery in corporate debt markets, many companies can buy back stock or indulge in corporate activity such as mergers and acquisitions, all of which should add to global equity markets’ vibrancy.
Fixed income in the main still paying next to nothing.
There is likely to be no let-up from central banks in 2021 regarding the maintenance near-zero interest rates. This is likely to anchor yields in the credit markets at or around the levels they have ended 2020. In our view, government debt has almost stopped being a return asset and more an asset that provides risk diversification. When times are good, yields are negligible. When times are bad yields can fall well into negative territory providing the investor with capital gains to offset losses in their risk assets bucket.
Increased allocations to Asian assets…..
We expect international investors to accelerate the diversification of the geographical exposure of their portfolios into Asia. As the year closed, experts predicted that China would be the world’s largest economy by 2028. Yet, international investors probably have invested less than 5% of their assets in ‘China’s markets. The COVID19 crisis has laid bare the long-term challenges in developed economies now worsened with a further build-up of government debt.
…even if the trade war is not going away.
The Biden administration will be run by respectable folks who have a grounding in expertise and diplomacy, a welcome change. That does not mean it will be looking to soften the hawkish stance the previous administration took materially. The tensions between the two superpowers will remain. Investors will have to learn to live with the occasional jarring headline, but also to trust that while the underlying rivalry is alive, the strategic case for Asia as an investment destination remains powerful.
Gold has not lost its lustre.
While the world may have found a vaccine for COVID19, it has not found a solution for many other issues that ail the global economy. Governments still use profound amounts of debt to buy their way out of their problems, while the world’s major central banks are increasingly monetising the debt through quantitative easing. There is nothing sustainable in these actions of policymakers. Ongoing fears about monetary madness should support gold and silver even if cryptocurrencies have an increasing number of fans.
The world is still very unprepared for the pending climate crisis.
COVID19 showed us that despite warnings over decades about a pending pandemic crisis that the world preferred not to listen and only deal with the challenge when it was on the world’s doorstep. Global warming may have garnered some respite from the COVID crisis; however, it has not stopped the world from warming. As the UN recently reported 2020 is likely to turn out to the third hottest on record, “We saw new extreme temperatures on land, sea and especially in the Arctic. Wildfires consumed vast areas in Australia, Siberia, the US West Coast and South America, sending plumes of smoke circumnavigating the globe” (source UN).
Asset allocation to broaden for institutions and the masses
With central banks likely to maintain interest rates at near-zero for some years to come, we expect institutional investors to turn more aggressively to alternative less-liquid assets classes.
We subscribe to the growing view that well over 50% of institutional and family office wealth will be invested in private assets in the future.
For the retail investor, the digitalisation and fractionalisation of previously illiquid assets such as real estate and private equity are likely to make them much more accessible for even less-wealthy individuals in the future.
Our Hopes for 2021
In search of a Sustainable World
GDP growth is a poor measure of long-term economic success. The world needs sustainable development. We now see the consequences of government policies that supported growth by numbers but not quality. In search of ‘great’ GDP growth, governments cut back healthcare budgets, and research on vaccines much reduced. Only at the last minute, of the last hour, has medical research saved the global economy.
Climate change took something of a backseat in 2020 to the medical crisis; however, it remains ever-present, and a massive danger to the world. Even with people severely restricted in their global mobility, 2020 has turned out to the second hottest on record. UN President Tedros recently remarked that “any efforts to improve human health are doomed” without fighting climate change.
The good news is that more investors are voting with their assets for a more sustainable world. Indeed, PwC recently predicted that by 2025 60% of mutual fund assets will be ESG.
Policymaking needs to evolve from saving the next three months to planning for the next decade.
At this point, there probably isn’t a part of the world that isn’t highly dependent on help from governments and central bankers to keep the growth going.
However, a structural fall in global GDP growth was well underway well before COVID19 hit. For over a decade, the authorities have propped-up growth through tactical extremely low interest rates and continuous surges of government spending. Donald Trump’s largesse with tax cuts the worst of the bunch. However, at least in the past year whether you think it is right or wrong without the extraordinary measures, the global economy and markets would be in more significant trouble.
Better policymaking in 2021.
Governments will have to play a balancing act between keeping their economies going through the recovery from COVID and being a catalyst for creating better quality growth in the future. ‘US-style’ large payments to households buy time but do not prepare the households for what may be a very different jobs markets in the future. Corporate tax cuts that are not in some way linked encourage a corporate culture of sustainability achieves little in the long term.
What have extremely low interest rates achieved but inflated asset prices and a massive increase in indebtedness at corporate and government levels? Analysis by Bloomberg shows that a quarter of the top US companies in the Russell 3000 index are not presently earning enough earnings to pay their interest expenses. Collectively their debt has risen from US$1.05 before the pandemic to US$1.98 trillion. These so-called zombie companies are soaking up a significant amount of US savings and are likely to achieve very little sustainable growth in the future. The list includes airlines, energy stocks and bricks and mortar retailers.
We are hopeful that President-elect Biden’s slated policies on investing in infrastructure and encouraging policies that fight climate change will see the light of day. In China, the country’s leadership has directed its economic strategy to sustainable growth through greener policies. Recent initiatives include an aim to reduce carbon dioxide emissions by 65% from the 2005 level. Ning Jizhe, deputy head of the National Development and Reform Commission recently said that China aims to reform and open-up, pushing forward green development and guaranteeing people’s well-being.
That we come together and don’t drift apart
Trade wars and the rise of nationalism do not serve the world well. Our abiding hope is that the world comes together to resolve poverty, conflict and climate change. To build and develop a more equitable, inclusive world to everyone’s benefit.