High hopes

Stirring up high expectations and promising too much, but delivering too little, is generally not appreciated by investors and is often punished by capital markets. It is usually more rewarding to keep expectations under control, so to speak, in order to be able to significantly exceed them. Unfulfilled hopes often leave investors with a bitter aftertaste. In the second year of the corona pandemic, expectations and investors' hopes are enormously high, and with them the potential for disappointment. Both the monetary and the fiscal policy measures appear to have already been largely discounted on financial markets. In addition, enormous expectations are placed in the new US President Joe Biden to deliver in only a short period of time. Therefore, the potential for disappointment is high. 

Unbroken belief in the omnipotence of the central banks

The central banks of the largest economies (G10) are expected to continue to pursue a quasi monetary policy “à la discretion“ in 2021. Graph 1 impressively shows the expected monthly monetary expansion of the G10 central banks in the current year.

In financial markets, the monetary authorities are expected to keep the money spigot open and support the markets with a sustained flood of money. More than USD 300bn per month of additional quantitative easing by central banks is expected by investors, with around 80% of these funds being used to buy government bonds in order to influence yield curves accordingly. For private investors, the only option then is often to invest the available liquidity in riskier assets. The extent of the additional liquidity created by central banks becomes obvious when we consider that this corresponds to 6-10% of the respective gross domestic product. On the one hand, we believe that faith in the omnipotence of central banks is unbroken, but on the other hand, expectations and hopes seem exorbitantly high.

Fiscal stimulus – the central bank policy’s twin 

When the euro was introduced about 20 years ago, the European currency unit was tied to the Maastricht criteria. These criteria were intended to ensure that the individual euro countries, many of which have very different political structures, would not be tempted to permanently live and spend above their budget limits. Of course, the European Union’s criteria do obviously not apply to countries like the United States or Japan, but the original idea of limiting the maximum government debt to GDP ratio to a maximum of 60%, as well as a net new debt of no more than 3% of GDP, makes perfect economic sense. Even before the corona pandemic, many G7 nations had debt levels of over 100% of their economic output. Japan, as the world's third largest economy, was the frontrunner with 240%.

Now during the Covid-19 crisis, most countries have blown all limits, especially in terms of new debt, and not only in 2020, but also in the current year we will be well above the 5% mark, as graph 2 illustrates. It also remains to be seen how great the impact of the federal election in Germany in September will be in terms of possible election gifts in the form of further fiscal stimulus measures. 

US President Biden has no time to lose

Even before Democrat Joe Biden is sworn in and moves into the White House, the new US President has already announced another fiscal package worth another USD 1 900bn, which is roughly the equivalent to 9% of US GDP. With an extremely narrow majority in the US Senate, President Biden does not have all political freedoms and he will be forced to forge alliances. Nevertheless, the direction is clear: the distressed economy and population will be guided through the ongoing corona crisis with even more fiscal stimulus. From our point of view, much is expected from the new Biden administration in its first 100 days and hopes are undoubtedly very high. 

Gold has potential again

The additional liquidity from the dual stimulus of central banks and governments has impacted all asset classes over the past three months. Equity markets have seen the largest inflows in the last two months. Record low credit spreads are being recorded in the junk bond sector, and in some cases risky government bonds are yielding close to zero. In this environment and following the correction in recent months of nearly 15%, gold seems attractive again in the medium to long term. In our view, the yellow metal remains a pillar in any portfolio. Across assets, we maintain our preference for equities over bonds.