16 December 2020
2021 Forecast: from darkness to the light
Peter Vanden Houte
Chief economist ING
What does 2021 have in store for us? Discover our economic prospects and our investment recommendations.
2020 was set to be a year of transition, in which the only significant events should have been the American presidential election and the post-Brexit trade agreement. Things did not go as expected, to say the least. Now that it’s time to take stock of the past year and consider the prospects for the year ahead, feelings are predominantly mixed: the arrival of a vaccine is certainly creating a sense that there will be deliverance in 2021, but celebrations will no doubt be marred for some by the permanent damage of the most severe economic crisis since the Second World War.
The recovery vaccine
News that we now have several effective vaccines against Covid-19 allows us a degree of optimism for 2021. But this doesn't mean that numerous countries, Belgium included, will escape another recession. The second wave of the pandemic coupled with a higher risk of infection during the winter will see to that. However, as the vaccine becomes widely available, the recovery should accelerate from the second quarter onwards. That's despite the probable increase in both the unemployment rate and bankruptcies. The use of savings built up by many households in 2020 will play an important part in the economic recovery, as will the still highly accommodative monetary and fiscal policies.
- 2021 will therefore be a year of synchronised recovery worldwide. Thanks to improved management of the pandemic, China, and Asia in general, have taken the lead in the recovery. The United States is certainly going to roll out additional fiscal stimulus, which should assure a dynamic bounce-back. In Europe, the recovery fund should support the economy in 2021. With economic growth of 7% expected for China, 3.9% for the US and 3.5% for the eurozone, 2021 should be a solid year. But it's worth saying that the loss of activity in 2020 won't be entirely offset in many countries.
- "The mountain of debt caused by the Covid crisis is not a problem for now," so says Peter Vanden Houte, Chief Economist at ING Belgium. Thanks to very low interest rates, the interest burden on governments' debt is actually less today than it was during the financial crisis and that will continue to be the case for several years.
- Alongside the Brexit saga, political developments in the US could play an important role in economic and financial developments in 2021. If the Democrats take both Senate seats in Georgia in the local election on 5 January, Congress will be entirely controlled, albeit only just, by the Democrats. That could open the door to increased tax pressure on businesses and more regulation. It could also lead to a more substantial recovery plan.
- Because of the synchronised recovery, energy prices are likely to be higher than in 2020, which should be reflected in slightly increased inflation next year. However, core inflation is likely to remain weak. The explosion of central banks' balance sheets will probably have only a limited impact in 2021 on consumer prices' trends. Japan’s history, where the central bank's balance sheet has grown sevenfold since 2000 without the slightest increase in prices, shouldn’t be forgotten.
- Short term interest rates will probably be held at very low levels for a few more years to sustain the recovery. Bond yields are likely to increase somewhat too but Peter Vanden Houte says this movement is likely to be tempered by the continued purchases of bonds by central banks. For instance, the European Central Bank’s asset purchases have brought down long-term rates in the eurozone by just over 1%.
- Following several years of over-valuation, the dollar has, at last, started to correct. Because of its counter-cyclical nature and its status as a safe-haven asset, the dollar is likely to see its attractiveness diminish in 2021, although we could still see sporadic spikes in volatility on the financial markets leading to temporary appreciation.
Equities grow wings
A few months ago it would have seemed barely imaginable, and yet it's happened: equities are back in positive territory (in local currency terms) over the year as a whole. The MSCI index of main global stocks has rebounded by more than 60% since the end of March, reaching a new record high. Investors do not seem in the least bit frightened by valuations that have not been as high for twenty years. Equities are sometimes trading at 30 times annual earnings, a level that recalls the 'dot com' bubble. They have also started to factor in their expectations about the economic benefits of the vaccines, which should allow governments to gradually ease lockdown measures. Hopes of less chaotic management of the US economy, with the arrival of Joe Biden in the White House, is also helping here.
At the same time, central banks consider it essential for the revival to keep the cost of borrowing as low as possible. According to Steven Vandepitte, a strategist with ING Belgium, investors with a long-term view will now be inclined to favour corporate equities and bonds rather than the safer sovereign debt and cash. The expected dividend yield on the major global equities of the MSCI index indeed remains 1% above the average yield of the Bloomberg Barclays index of investment-grade bonds.
The prospect of renewed public expenditure is also likely to support equities, and no doubt small caps rather than large caps. But we should not lose sight of the fact that not all businesses will benefit in the same way from the fiscal stimulus.
- The construction materials and manufacturing sectors seem better positioned to the extent that they include many companies which are active in public works and infrastructure. These companies are also benefiting from the economic recovery in Asia.
- Energy from alternative sources and clean technologies will no doubt continue to attract investors, particularly given the US policy on climate change, which looks set to be revitalised thanks to the election of Joe Biden. Indeed, he wishes to re-join the Paris Agreement as soon as possible and to bring about the decarbonisation of the US electricity sector by 2035.
- The IT sector will likely continue to be favoured by investors since the technological revolution is far from over. Companies with sound balance sheets, solid sales platforms and the ability to increase their market share seem well-positioned. We’re thinking more particularly of those active in the Cloud, data processing, robotisation, cybersecurity and artificial intelligence areas.
- The need for governments to have a health system that is capable of facing further crises is also likely to favour the pharmaceutical sector.
- As for commodities, industrial and precious metals should outperform oil. Global expenditure on "green" infrastructure looks set to increase in the US, Europe and in China in the coming years, and this enthusiasm should sustain demand for industrial metals.
- The prospect of a weaker dollar and slightly higher inflation should support gold. The two main factors leading gold prices to historic highs - negative real yields and the abundant liquidity injected by central banks and governments – remain in place.
- Finally, we can also expect an increase in capital flows to emerging market equities and bonds, and more particularly into Southeast Asia. We see that the countries performing strongly on stock markets are also those which have best managed the health crisis or where the lockdown measures haven't acted as a huge brake on economic activity.
Get a wider view of the perspectives and challenges to come in 2021 by country and by region, as outlined by ING’s economists. > Read the complete analysis