Home2021 Investment Thesis

2021 Investment Thesis

The year ahead sets up to be one of economic recovery, should the rolling out of the COVID-19 vaccines be effective in stopping the pandemic. The consensus is that the global Gross Domestic Product (GDP) will grow well above 5% in 2021, fueled by policy accommodation measures still in place. 

The Chinese economic growth is expected to continue in 2021 and reach close to 10%. While in the developed world the growth rates are not that high, the U.S. growth should exceed 4%, just like the Euro area or the United Kingdom.

One caveat applies – all these scenarios consider the end of the pandemic in 2021. The sooner it happens during the year, the bigger the chances to recover to the pre-pandemic growth rate.

Equity Market

The consensus is that the equity markets’ bullish momentum should continue in 2021 especially given a weak USD and increased stimulus from the Fed. Consumer stocks should have a strong comeback while “work from home” stocks should take a step back. Moreover, structural growth stocks should become less attractive.

Outside of the U.S., the equity market suffers from stronger currencies. As the dollar declined significantly against all G10 currencies, stock indices in other parts of the world failed to replicate the U.S. stock market performance. If the dollar’s decline continues, expect the differential to remain intact.

Currency Market

We can say that 2020 had two distinct parts – one characterized by a stronger USD in March and April, followed by a sharp decline. Those missing these USD trends missed the most relevant price action in the year.

For 2021, the market’s position for continued USD weakness. However, the danger here is that the lower USD trade becomes too crowded, especially against certain currencies like the EUR or AUD.

Fixed Income

The name of the game during the pandemic and the economic recession was for the central banks to lower the rates close to zero and to engage in aggressive quantitative easing programs. The aim was/still is, to bring down the long-term yield. Thus, businesses and households have access to favorable conditions for investment and so the central banks stimulated the economic recovery.

Unfortunately, lower yields made it difficult for investors to place their capital. Logically, the stock market benefits the most from depressed yields, but the trend should change if the economic recovery gains steam in 2021. As such, expect government bond yields to come back, as well as a strong demand for emerging markets bonds as they offer attractive yields too.

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