2021 – The Bestest Year?

2021 – The Bestest Year?

Ok, I am exaggerating. A lot. But that seems to be the tone from the commentariat.

Markets have come back solidly from the early part of the year, but fret not, this is still a bull market.

Due to the continued challenges of the ongoing Covid spread, it is very easy to get quite concerned, but I believe 2021 is likely to be a very good year for asset prices in general, and Global Equity prices in particular.

From a health policy standpoint is quite warranted, economically speaking, things are falling in place quite well.

Extraordinarily supportive monetary policy, fiscal expansion earlier in the year and further expected fiscal policy measures to be taken before or immediately after the Biden Administration takes over, higher household savings, significant easing of financial conditions, continued momentum in economic activity and the confidence building news with respect to the efficacy of new vaccines and Covid Therapies, should all help for the growth rate in 2021 to be meaningfully higher.

That being said, and lest we get carried away, despite a very good year in 2021, economic activity level will probably remain below those of 2019. Further, from what I can tell, we have not taken, and are very unlike to take, any policy actions that is likely to change the long-term trend growth rate of the global economy one iota. That is, after the global economy has made up the covid related drawdown with a potential 6% global growth rate in 2021, the developed world will still remain mired in low trend growth.  The only positive outcome in that regard is that massive monetary and fiscal policy intervention prevented the situation from getting far worse.

Nevertheless, the cyclical outlook for global growth in 2021 is quite good. Central banks have committed to keep monetary policy extraordinarily easy.  And with the fear of covid spreading lifting by middle of the year, asset prices are likely to move higher. The upside, of course, would have been higher, if we had not done as well as we seem to be doing in 2020. But Equity Risk premium is high and given the growth momentum, 2021 will still be quite good.

In a contraction-recovery-expansion-slowdown framework for economic activity and ensuing asset price trends historically, we will be solidly in the expansion phase and equities do quite well in that environment as result.

As I mentioned before, from a longer-term perspective, it is still a growth short world, and therefore from a longer-term perspective, given low inflation and rates, it very much remains a growth equity world. However, much like the near-term cyclical rebound in the growth outlook, it is quite likely that the cyclical part of the market does better. But again, much like the growth outlook, it will be temporary and short lived, and we will revert to the growth regime in not too distant a future.

Further, if there is ever going to be year for international equities in general and EM equities in particular, 2021 would have to be it. The economic environment and market drivers could not be any more favorable – lower dollar, global economic expansion, higher commodity prices, lower rates, all point to a good year for international EM equities. However, I have a suspicion that any outperformance may be short lived as well.

At the end of the day, the last bull market got killed by Covid in March 2021. And a new bull market began immediately thereafter backed by policy support. That trajectory continues in 2021 with a bit of meander. Covid gave us a shock and changed a lot of things, but temporarily. While 2021 would be a good “cyclical” year, from a longer-term perspective, not a whole lot has changed.

Simply put, Covid got us to a meaningfully lower rate environment a bit faster, and with more shock and awe, than we would have gotten otherwise. But it really has not changed the overall path much. To change the longer-term economic outlook, we need a different set of economic policies and there is no political appetite for that. To be honest, Capital markets are getting boring and predictable.