Will we ever forget how challenging 2020 has been? Definitely not. The global health system was under constant pressure, and we were forced to live and interact differently. Anxiety levels increased and we had to constantly adapt to different challenges. From an economic perspective, the first wave of COVID-19 has resulted in a strong economic contraction, as many countries quickly imposed lockdowns. Many governments were quick to react in response to the pandemic, and government stimulus measures were introduced globally to try and limit the negative impact.

In addition, from a monetary policy point of view, central banks injected fresh capital in the financial system in order to elevate sentiment, which had reached a low towards the end of March. Probably one of the biggest surprises for many is the quick recovery recorded by certain global equity sectors. The S&P 500 registered an increase of 15%, as investors turned bullish following the US election and news of an effective vaccine. Meanwhile the Nasdaq Composite surged by more than 40% in 2020, powered by the strength for tech stocks. Their earnings got a boost, as a lot of businesses and government agencies started to introduce the idea of work from home. Moreover, government bond yields declined, making future earnings more valuable.

Now that the US election uncertainty is history and the vaccination process is underway, the major risk for financial markets is investor optimism. COVID-19 infections are increasing, leading to lockdowns once again, which could mean that next year will be split into two phases. The first one being the most challenging, as measures need to remain in place to combat the spread of the virus. However, the outcome of the post-vaccine period should be another strong result for the year. Hopes are also rising for the tourism sector to bounce back during the second half of 2021.

The Federal Reserve did not indicate that its monetary policy path will change in the near future. This has definitely helped both the economy and markets to hold on. More government supplements should help citizens in the hardest hit sectors to make ends meet.

On the other side of the globe, Europe continues to grapple with the pandemic. Fiscal support, wage supplements and job retention schemes have prevented a significant rise in the unemployment rate in most countries. A strong post-vaccine recovery is expected, given the European markets’ exposure to financials and cyclically sensitive sectors. Moreover, European indices suffered a large hit so can rebound from a low base.

During November, news of a successful COVID-19 vaccine started to spread, shifting investors’ focus from tech stocks to more cyclical value stocks.  A global recovery and higher bond yields are the main factors that should aid both value and cyclical equities. These relatively cheaper value stocks are likely to benefit when the economy returns back to normality.

In the United Kingdom, the gross domestic product is expected to bounce back following the release of vaccines and a Brexit deal – given that value stocks tend to outperform the market during the early stage of an economic recovery. However, the road to recovery is likely to remain volatile. The UK Government has also provided support for the short-term, which ultimately need to be withdrawn. The economic outlook still remains uncertain despite the UK leaving Europe with the much awaited deal. Currency developments however could help to counteract this.

Meanwhile, China has almost reached its pre-COVID economic level, which is an astonishing achievement given the significant downturn during the first quarter of the year. Sectors exposed to long-term growth are expected to outperform, while a global economic recovery should help cyclical sectors, as valuations are still cheap when compared to growth sectors.  Given this robust economic recovery, Asian equities are likely to deliver attractive returns, as the virus has been contained in considerable parts of the region.

Optimism about global growth in 2021 is on the increase and in line with recent vaccine news. This will be a challenging year for equities following a strong recovery in major indices since late March, as it will answer a very important question – whether the positive movement was created by stimulus packages or due to sound corporate financials. Investors will also base their decision on the efficacy of vaccines to control the virus.

Another potential risk for equity markets is rising bond yields. Tech stocks recorded a surge in valuation as a result of lower discount rates, and represented most of the gains in the overall market for 2020. However, if interest rates remain low, company dividends are likely to be more attractive than interest from bonds. Moreover, companies can also increase their dividends while bonds’ coupons are fixed.

Meanwhile, investors’ interest in certain investment themes such as sustainability is set to continue in 2021. This pandemic has increased the awareness for sustainable investing, and this trend is expected to keep growing in the following months. Increased pressure is being put on listed companies to align business models with ESG standards. President-elect Joe Biden has requested to re-enter into the Paris Climate Agreement and reverse environmental de-regulation. Meanwhile, in Europe, stimulus packages were aligned with the European Green Deal as a response to the pandemic.

Analysts are expecting a gradual rise in equities in 2021 with the COVID-19 vaccines, alongside an extension of low interest rates and improving economic activity. This means that the economy might be moving away from the need of fiscal policy reflation, as potential for a vaccine-driven reflation is increasing.

During the last two months of the year, investors’ optimism about the future has increased with hopes for an economic recovery and a return to normality. Most likely, investment focus will shift from growth stocks to value and non-US equities that will benefit when economic activity reaches its normal levels.

 

Lianne Zahra B.Com Hons Banking & Finance is a Trader at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email [email protected]