February 2021 Market Brief

Coronavirus

The initial wave of vaccinations will likely bring about a sustained decrease in hospitalizations as elderly populations, which account for 60-70% of hospitalized patients in the US and UK, are vaccinated first. We expect large shares of developed market populations to be vaccinated by mid 2021. 

Growth

The global economy now stands at 66% reopened, although retail and hospitality remain sensitive to COVID-19 restrictions. We expect the Biden administration’s proposed COVID relief plan, the EU recovery fund, pent-up demand, and an accelerated vaccine rollout to bolster the recovery through relaxed restrictions and reductions in voluntary social distancing.

Inflation

While significant policy easing is typically cause for inflationary concern, sizeable slack in the economy from depressed capacity rates and elevated unemployment levels will likely keep inflation contained in 2021. Although inflation is expected to receive a boost from base effects mid-year given COVID-driven weakness mid-last year, we anticipate this rise to be transitory, with global core rates expected to end the year at 1.8%. 

Equities

The equity momentum from 2020 should continue into 2021. Our expectation for more upside is supported by 1) above-trend, above consensus global growth, 2) double-digit earnings catch-up, 3) limited structural imbalances and scarring effects, 4) predictable, macro-guided central banks, and 5) a near-zero policy rate. Compositionally, earnings growth may drive returns more than valuation, as is common in expansionary phases.

 Credit

Credit spreads across the quality spectrum have reverted back to pre-crisis levels, but we believe the improving default backdrop, carry potential, and low risk of excessive reflation should still attract investors looking for yield. In Europe, a stronger ECB and more conservative balance sheet management should enhance credit quality relative to US credit. 

FX

A weaker USD remains our base case, though a more moderate pullback should be expected. While market consensus may crowd the trade, we think selling pressure has been concentrated in tactical positioning so far. Surprises to the pace of vaccine recovery or growth expectations are risks to our view.

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