What 2021 May Have in Store for the Global Financial Markets
December 21, 2020
By Acuity Trading
‘Tis the season to be jolly and the market’s mood in December certainly feels that way. Is it because investors are eagerly waiting for 2020 to be over?
The year was marked by travel bans, supply chain disruptions, heightened uncertainty, and deep concerns over the global economy. Despite these setbacks investors have a lot to cheer about. The US Presidential election is behind us, clarity around the Brexit deal, either way, is at least close and there are visible signs of a global economic recovery underway.
The Case for a Bullish 2021
The single most important impact on investor sentiment worldwide seems to be the pharma majors gearing up to begin marketing their covid-19 vaccines. This will likely be the case through the first half of the new year. Covid-19 vaccines will ease restrictions, bring the energy, travel, and entertainment sectors back on their feet and propel economic growth.
The Organization for Economic Cooperation and Development (OECD) projects global economic growth at 4.5% for 2021. Financial markets worldwide are likely to remain buoyed by a potential v-shaped recovery of the global economy, from a mid-single-digit contraction in 2020 to mid-single-digit growth in 2021.
Image: Real GDP Growth Forecast, Source: Statista
Against this backdrop, investor risk appetite is likely to improve. Boosted by this, Goldman Sachs expects the S&P 500 to gain 15% by the end of 2021.
Barclays too expects the S&P 500 to cross the 4,000-point mark in 2021 and for European equities to jump to record highs. “We remain overweight risk assets over core bonds, as investors look through the near-term drag of the winter covid surge and focus instead on a resilient global economy and a faster return to normalcy in 2021/2,” Ajay Rajadhyaksha, Head of Macro Research at Barclays, said in a recent note. With markets favouring riskier investments, demand for safe havens could decline. Citibank analysts expect gold to tumble below $1,800 and test new resistance levels in 2021. The US dollar is also expected to face significant downward pressure versus other major currencies.
Without a Doubt, Uncertainties Will Remain
Covid-19 news is likely to remain in focus and can have a profound impact on asset classes across the board. However, market movements will probably be far from stable and investor sentiment may remain cautiously optimistic. This is because the covid-19 vaccines are not magic wands. There are several hurdles yet to be crossed. These vaccines, based on biomolecules, are highly susceptible to damage. The Oxford-AstraZeneca vaccine can stay for six months in temperatures between 2°C and 8°C, while Moderna’s needs -20°C and the Pfizer- BioNTech vaccine requires less than -70°C. Exposure to higher temperatures not only makes the vaccine less potent, it can make them toxic. This means their storage and transportation will be tricky, expensive and require the right infrastructure developments. While such costs are lower for AstraZeneca’s candidate, this vaccine has shown far lower efficacy in trials than the other two.
Image: Comparing Pfizer, Moderna and AstraZeneca vaccines, Source: Thomson Reuters Foundation
The good news is that experts have predicted herd immunity to begin kicking in by the final quarter of 2021. Covid-19 vaccine rollout news and rising immunity in various countries could keep markets volatile through 2021. If 2020 has taught us anything, it’s how to trade amid high volatility. These strategies will come in handy in 2021 as well.
Sectors to Look Out For
The industries that benefited from the pandemic are likely to maintain their strength next year. This is because the restrictions have had a deep impact on our lifestyle and caused a secular shift in consumer behaviour. Ecommerce, digital technology, consumer staples, and homebuilders, could retain their strength through 2021. On the other hand, sectors like airlines, hospitality, and automobile could begin their ascend as the economy recovers. The energy sector would witness tailwinds from rising economic activity and likely output cuts by the OPEC+ (Organization of Petroleum Exporting Countries and their allies). The US EIA (Energy Information Administration) projects energy prices to recover meaningfully in 2021, with rising demand and declining global oil inventories.
Regions to Monitor
China could grab investor attention. The Asian dragon’s economic growth is projected to accelerate to 8.4% in 2021, according to analysts polled by Reuters. China will not only be the engine of global economic growth in 2021, the Shanghai and Shenzhen stock markets are expected to continue strengthening. The US and eurozone are two other regions that will be in focus. These regions have already achieved a better-than-expected rebound and all eyes will be on economic data releases from the world’s most influential economies. Goldman Sachs expects US GDP to return to pre- pandemic levels by mid-2021, with Joe Biden taking the oath of office in January and progress
on the vaccine front. The gradual rollout of fiscal stimulus measures will also keep the economy and market sentiment alive and well.
The Bottom Line
Amid the pandemic, central banks of various countries had slashed their benchmark interest rates to trigger economic growth. These rates are unlikely to be revised higher any time soon, at least not in 2021. As people keep looking for alternatives that offer potentially higher returns than bank savings and government bonds, trading volumes in the global financial markets may continue to grow in 2021.