The year 2020 was undoubtedly a year of extremes. At its center was undoubtedly the Covid-19 pandemic, which had a massive impact on economies and capital markets. For example, in the spring of 2020, the US unemployment rate rose from its lowest rate in 50 years to its highest level in over 80 years within just a few weeks. At the same time, one of the sharpest declines in global economic growth was recorded. However, the significant contraction in global GDP was short-lived, followed by a V-shaped economic recovery. China acted as the economic locomotive, as the world's second-largest economy was already able to make up for the corona-related slump in the fourth quarter of 2020. On capital markets, March 2020 was the most volatile month in history. Global stock markets (as measured by the MSCI World Index) at times lost more than -30% of their value within a few weeks. However, the subsequent recovery was as impressive, representing the strongest rally since the Great Depression in the last century.
At the beginning of the new year, global economies continue to recover. The data of recent weeks show a positive picture for the most part, and this despite the ongoing corona waves in the Western hemisphere. Some isolated indicators may have disappointed, but the bulk of the figures signal a steady continuation of the V-shaped economic recovery, with rates of change moderating slightly. Currently, we are in a classic setup of making two steps forward and a half step back. This trend tends to be reinforced, on the one hand, by further success in the development and use of Covid-19 vaccines and, on the other hand, by renewed restrictions on public life to combat the pandemic. The best example is the renewed nationwide lockdown in the UK.
Nevertheless, leading indicators of the most important economies, first and foremost China, but also the US, seem to confirm a sustained recovery of the global economy from the corona shock. Support is being provided by the expansive monetary stimulus from the major central banks (Fed, ECB, Bank of England, Bank of Japan and the Chinese central bank) and fiscal stimulus from major economies on an unprecedented scale. The dual stimulus is not only providing an enormous tailwind for major economies, but also represents an important cornerstone for the capital markets. Following the recent USD 900bn fiscal package passed in the US, after tough wrangling, it remains to be seen whether further stimulus packages can be expected under the new administration of future US President Joe Biden, who will be sworn in on January 20. We would not rule this out, as on the one hand the long-term unemployment rate in the US has hardly improved in recent months and on the other hand the world's largest economy is already in its third corona wave, with unclear implications for the further course of the economy.
On an aggregate basis, 2020 was a year to forget regarding corporate profits – a classic “annus horribilis“ – as most sectors suffered a double-digit slump. This year, on the other hand, could be the opposite. In our Outlook 2021 (“Vaccine hope“, dated December 9, 2020), we already pointed to a strong earnings recovery of global companies in the new year. Of course, the basis for comparison is very low due to the sharp earnings drop in 2020, but earnings revisions of global companies have been solidly in positive territory for months. The central banks’ continued ultra-expansive monetary policy, which offers companies record low refinancing rates, is likely to have a positive impact on corporate earnings as well as margins in the current year.
Over the past decade, the hunt for positive returns has steadily intensified, and the corona crisis has further accelerated this trend. Nearly USD 18 trillion of outstanding bonds already show negative yields. Recently, even ten-year government bonds from Spain and Portugal were trading at negative yields. Therefore, investors currently have to take more risks in order to be able to generate a positive return at all.
Against this background, our preference for equities over bonds will remain unchanged for the coming weeks. We are aware that we will have to expect more frequent fluctuations on capital markets in the course of the coming months, but the relative attractiveness of equities will remain – compared with almost every other liquid asset class. The signs of seasonality are historically positive for the first month of the year and financial markets should certainly benefit from this January effect. Gold remains attractive across assets in our view, because on the one hand, the opportunity cost of the precious metal, while offering neither a dividend nor an interest rate, remains low. On the other hand, gold continues to represent a safe value against further “experiments“ by central banks and governments.
Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Author: Thomas Wille, Head Research & Strategy, Email: firstname.lastname@example.org
Editor: Alessandro Fezzi, E-Mail: email@example.com
Source: LGT Bank (Switzerland) Ltd.
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