Day 1 - Tuesday, 24 November 2020
Summary: Outlook 2021 - macro and financial markets
The impact of COVID-19 is expected to cause the deepest contraction in global output seen since the second world war. However, with a vaccine seemingly on the horizon, activity should recover strongly from a low base with substantial monetary and fiscal stimulus aiding prospects. We anticipate economic growth of 5.4% in 2021. Monetary stimulus has driven equity market performance. That said, equity valuations appear expensive, with forward earnings multiples at similar levels to those seen during the ‘dot-com’ technology bubble. Further upside may be limited at an index level.
The next decade is also likely to entail lower returns and more volatility than seen in the last. This suggests that a diversified portfolio, perhaps including gold, hedge funds and private equity, may be called for. Fixed income can also play a valuable role, despite its recent positive correlation with equities. In any equity bear market, bonds tend to provide a positive return. Further income can also be generated through spikes in volatility as the global economy recovers.
- The contraction in the global economy, as a result of containment measures, has been four times the magnitude of that seen in the 2008 global financial crisis.
- Output is expected to recover strongly next year. But, there will be longer term consequences from an unprecedented amount of fiscal stimulus seen this year, amounting to approximately 11% of global output.
- While absolute equity valuations might seem expensive, on a relative measure they still look attractive. A focus on high-quality companies, looking at opportunities across regions and sectors, may offer much value.
- The next decade is likely to see lower returns and higher volatility. Portfolios will benefit from further diversification across gold, private equity and hedge funds.
- Fixed income provides income opportunities and can act as a hedge against market downturns.