Now that it's 2021, we can take some time to reflect on a difficult year and hopefully look forward to the light at the end of the tunnel. But many of the issues we faced last year are still things that we'll be keeping our eye on this year. The biggest areas of focus in the year ahead are:
- Covid- how the world recovers, and how economies adapt and restructure will continue to be a very important factor, which will rely strongly on our next point.
- Policy – we saw governments and central banks step up aggressively in 2020 to support the markets and the economy in the face of Covid. This year, policy needs to continue doing what it is supposed to. The dangers of withdrawing support early far outweighs any concerns about providing too much support.
- World Politics – there's a lot to consider this year, with key factors including Brexit, US politics, the EU pulling together, and a stronger China post-Covid.
- Ethical Investing – last year saw a significant boost in focus on ESG, Climate, and Social Change from both retail and institutional investors. We would expect to see these issues rise further in importance this year and in the future.
Recovery from Covid-19
We're looking at a very difficult path towards global growth this year, with economies recovering and finding their feet in a post-lockdown world. With various vaccines being rolled out worldwide during 2021, the situation looks promising in the longer term. This doesn’t offset the current extended lockdown restrictions impacting on the general mood, but the path ahead is unlikely to be smooth – highlighted by the identification of new strains of Covid-19.
The roll-out of the vaccine and policy (both fiscal and monetary) may take many different approaches, however the ones that we believe are likely could be:
- The world pulls together – we saw this at the peak of the Global Financial Crisis, with Central Banks and the G-20 coordinating a global response
- Countries coordinate their approach based on geographical regions
- Countries solely focus on themselves, expecting their neighbours to do the same
Unfortunately, we are likely to see varying degrees of the above. Although one of the key challenges remains as to how uniformly the various vaccines are rolled out across the globe. But also any approach by governments may be negatively impacted by the lack of appetite for a vaccine. While some countries like China, Brazil, and India have a strong majority of the population who would take a vaccine if offered, others like Russia, France, and Germany are less willing to accept it. (Figure 1 below).
Figure 1: How do different countries feel about Covid-19 Vaccinations?
While a successful Covid-19 vaccine roll-out is key for a global recovery, the weight of concern currently rests more on the Western Hemisphere's shoulders. As the Asia Pacific region had much swifter lockdown measures in place, they have been much more effective in reducing their infection rate. As such, they're in a strong position to wait for a vaccine roll-out, seeing which one works in the West. This means that we're likely to see volatility (ups and downs) persist in consumer and business sentiment, caused by regional news and data reports.
Sector by sector recovery
Just as a worldwide recovery is unlikely to happen all at once, the same is true of industries and sectors. The pandemic has been good to certain businesses, allowing them to expand their offering and even open out into new markets. For example, teaching, fitness, deliveries, online shopping, and cleanliness products have done well out of the pandemic.
Certain sectors such as airlines, hotels, restaurants, and the arts are likely to be stop-start throughout 2021 with localised restrictions and recoveries to be expected. However, once the world begins to see a true return to normal, we believe it's important not to underestimate the boom this could bring to the economy.
There are Policy Risks
As we're always on the lookout for any potential risks, it makes sense to discuss the most significant ones. In 2021, we believe the main economic and market risk could be a policy mistake – either by governments concerned about their deficits and cutting their fiscal support, or central banks concerned about loose monetary policy stoking the inflationary outlook. There's also a risk that constrained supply chains, and cautious businesses could see inflationary pressures spike if the virus burns out as quickly as it spread.
We believe that 'lower for ever longer' as a global monetary theme isn't likely to change any time soon. This is further reinforced by policy makers making it clear they are mindful of the need to balance marginal support against the potential structural shock to the economic system that a swift tightening could see.
But we have faith in Policy Support
Monetary and fiscal policy played a huge part in 2020, and the major central banks have all signalled their willingness to continue this support in 2021, working to keep interest rates low. This is important as, without it, we could see conditions change which would negatively impact the fiscal support provided by additional government spending. Low interest rates also keep down the cost of servicing debt for governments, and given that the total outstanding government debt and debt to GDP ratios are at the highest levels since World War II, every measure counts1.
The European Union's Recovery and Resilience Facility will make €672.5bn in grants and loans available to provide support for the next three years. But payments are not expected to start until summer of 2021. At the same time, one of Joe Biden's first acts of Presidency will likely be to push Congress for a follow on to the $900bn package that was agreed in late 2020. However, despite new administration in the White House, it won't put an immediate end to the US-China trade war. We'll also likely see a higher level of taxes being implemented but given the huge and lasting impact of Covid-19 the new President and Congressional focus is likely to be on boosting American growth internally. This approach may help reduce political tensions, internally and externally, but a K-shaped recovery will highlight concerns around inequality.
Then, there are the implications of Brexit, which warrants a full article on its impact.
Ethical Investing
In a year full of bad news, there have been some positives, and one of them is an increased focus on each aspect of ESG investing – Environmental, Social and Governance. This is likely to accelerate further with President Elect Biden taking a different tack from Donald Trump with reports the 46th US President will re-join the Paris agreement on the first day of his Presidency2.
Over the last decade, we've seen a sharp rise in companies improving their performance in line with the Environmental element, with much of the world committed to the Paris Accord. But now, as we're all socially distancing, investor focus on "Social" within ESG has accelerated significantly. With the pandemic highlighting companies failing to provide safe working conditions, ethical treatment of workers and supply chains, and unfair pay, the Social aspect is linked to more than perceived fairness. By putting a robust process in place and taking a stand against these issues, companies can boost their risk management by decreasing potential controversy while retaining an engaged workforce for longer.
Similarly, as investors and consumers look ahead to 2021, they will likely see an increased focus on corporate tax avoidance and the alignment of executive pay to the average staff member rather than just those at the top. In fact, research predicts that ESG investing could represent more than 50% of European mutual funds by 2025 (think of funds as hampers full of investments)3. At Wealthify, we're already working hard to ensure that our ethical funds have an active component to ensure due diligence with frequent checks on each company's status within our funds.
If hindsight is 2020, what is 2021?
All of this reinforces our cautiously optimistic view, that following a difficult year, economies should see lockdowns ease going forward as vaccines are rolled out. Having less, or less severe, lockdowns, will bring a natural boost to growth, particularly as pent-up consumer demand and investment appetite returns. With many businesses unfortunately closing during 2020, activity is also recovering from a lower base. Crucially, policy makers appear to have learnt their lesson and have delivered significantly more support during 2020 which could continue into 2021. This support will need to be paid for, and ultimately withdrawn to some extent, but that remains a minor concern next to the alternatives. It’s important to note that, on the whole, economies and people do adapt rapidly to change4. It’s likely that we’ll see ESG’s continued ascent bring to the forefront new industries, and investment into those will help create jobs and boost GDP.
References:
1: Bloomberg data
2: https://joebiden.com/climate-plan/
3: https://esgclarity.com/esg-assets-could-grow-to-more-than-50-of-total-european-fund-aum-by-2025/
4: https://edinburgh-innovations.ed.ac.uk/2020/05/05/innovation-in-a-time-of-crisis/
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