2021: A multi-asset perspective

After Covid-19 struck, the fiscal and monetary anaesthesia applied was rapid and abundant in most countries and was able to dull the immediate pain of a severe contraction in economic activity.

As we look to 2021, the question will shift to how long and how effective can this dual cocktail of support continue in abating the economic pain that is the equivalent of a ‘leg being amputated ’ from the global economy and on a micro level there will be increasing discernment between which countries and companies will survive and thrive.

At the time of writing¹, it looks possible that as we begin 2021 the US Presidential election and Brexit might have moved, with some belligerence, into the rear-view mirror. Unfortunately, the other dominant theme of 2020, the contagion and disruption of Covid-19, appears less willing to join them.

However, there is some good news. The first Phase III vaccine trials have been far more successful than could have been hoped. The serology data is showing that nearly all the vaccines are immunogenic and are leading to antibody levels equivalent to having had the virus. A recent New York City study² showed patients who had recovered from the virus had antibodies five months after infection, supporting a view that vaccines might be able to give protection for 12-18 months, which is rather longer than some expected. Additionally, the mortality rates continue to be down overall. Earlier detection and improved treatment are reducing deaths per infection by about 30%-50% to date. So, there is considerable light at the end of tunnel, particularly as the Northern hemisphere heads into the spring and summer, where weather conditions will be less conducive to transmission.

However, the distribution of a vaccine remains a sticking point given that it is likely that most vaccines will require cold storage and two doses, a month or so apart. Given this complication in logistics, expectations of wide scale vaccinations in the US are being pushed back till the fall of 2021. Additionally, it appears that the anti-vaccination movement is gaining ground, which will undermine the aim to get to herd immunity levels. A recent PEW Research survey highlighted that those willing to take a vaccine in the US was falling³. In May 2020, 72% said they would take the vaccine if it were available and this fell to 51% in September with those saying they would not have the vaccination increasing from 11% to 24%. This shift is unlikely to be aided by apparent significant side effects after the second shot, about 30% of those getting it have a high fever and other moderate symptoms for 2-3 days. This will likely to be capitalised on by the anti-vac movement and significantly reduce compliance. There are also mutations of the virus, as we have recently seen in Denmark, which could enhance the severity of the disease, but so far, are not linked. As further mutations are likely, it raises the likelihood that vaccines will need to develop over time, as we are used to seeing with flu variants.

So overall there is an increasingly positive outlook, however, the issue and focus on the virus, is not disappearing any time soon.  

Fiscal and monetary anaesthesia

The longer-term economic impact of the virus will be felt most in areas like Europe where lockdowns are prevalent and, though the latter half of 2020 saw a V-shaped markets recovery, the reality remains that GDP levels in many countries are still down significantly. For example, in the UK, GDP is down around 10% on the previous year⁴.

For this reason, in addition to Covid-19 and the development of vaccines, the focus will be on the ongoing regime change for monetary and fiscal policies. It appears the key role of central banks is shifting to that of providing the backstop for fiscal stimulus. If that isn’t commonly assumed then one only needs to the Chief Economist of the usually fiscally hawkish IMF, who recently said in the FT that today's environment has “led to the inescapable conclusion that the world is in a global liquidity trap where monetary policy has limited effect” and “the ascent back from what I have called “the great lockdown” will be long and fiscal policy will need to be the main game in town.” She concludes that “monetary policy has and will remain central to this effort, but with the world in a global liquidity trap it is time for a global synchronised fiscal push to lift up prospects for all.”⁵

So as the efficacy of traditional monetary policies wane, the likelihood that less traditional policies are utilised increases and as such it appears that many developed markets may follow Japan and Australia into adopting a form of Yield Curve Control.

The conundrum for investors will remain the one faced since the Global Financial Crisis (GFC)– is it the economy or central banks that drive markets? The latter have been the dominant force and their inflationary power, though muted in Consumer Price Index terms, has been phenomenal in asset price terms since the GFC. However, if their focus shifts to providing a fiscal backstop, does that undermine their recent role as market backstop?

Interestingly in China, they appear set to move from their accommodative policy approach as they are increasingly confident in their economic recovery. China’s total debt to GDP ratio went up by 27.7 percentage points in the first 3 quarters of 2020 to about 270%. This rapid growth of debt appears unsustainable, as is similar debt fuelled spending in other countries. Hence the need for policy normalisation, to withdraw liquidity and reduce stimulus. In 2009, the People’s Bank of China started this process and it led to a sizeable correction in their bond and equity markets – China’s equity benchmark fell around 20% from July to August that year⁶. China, has led the world in numerous responses to the virus and they appear set to lead the world again by moving away from accommodative policies. How markets react to this shift will provide interesting read across for other markets as 2021 transpires.

What about returns?

With fixed income yields at very low levels, there appears little room for further capital gains and minimal income to compensate. This has led forecasters to make fairly muted long-term capital market assumptions that suggest a typical 60/40 fund is set to generate a 3.5% per annum return over the next decade vs the c. 10% per annum seen over the last 45-50 years⁷. Unfortunately, this lower return forecast is likely to be accompanied with higher levels of volatility – not a desirable combination.

Multi-nationals and ESG

Two other themes for 2021 include an increasing push back on large multi-nationals, which is likely to result in greater regulation and tax compliance. The second factor that will continue from it’s increasing focus in 2020 is ESG. This will be particularly relevant in Europe where the regulatory changes facing the investment industry will see the role of ESG become considered alongside a client’s preferences for risk and return. 

Overall, if Covid-19 continues to be less pathogenic and vaccines are developed quickly, then we might be in for a period of sustained growth that typically supports higher bond yields, fuels rising commodity prices, drives outperformance for cyclicals and value and a leads the US dollar lower. In that environment, we believe Emerging Markets and Europe could perform well. However, one will also need to keep an eye out for those pesky black swans too, because they don’t seem to be as rare as advertised.

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