January 10, 2021
The Haze of Uncertainty Is Lifting
The Haze of Uncertainty Is Lifting
January 10, 2021
Going into 2021, we expect the haze of uncertainty wrought by COVID-19 and U.S. politics to lift. For the global economy, this could translate into meaningful growth catalysts.
GLOBALLY: We believe the most promising of those catalysts is likely to be the introduction of effective and widely available COVID-19 vaccines around the world. Clearly, the eradication of COVID-19 would be a major factor in facilitating a quicker pace of economic normalisation in 2021.
UNITED STATES: Joe Biden is set to become the 46th U.S. president in January, with critical ramifications worldwide. In the near term, we expect the Biden team to provide a credible approach to managing COVID-19, coupled with an increase in fiscal stimulus to soften the ongoing economic impact of the virus. Longer term, we expect to see significant infrastructure spending, tied to innovative green technology, thus aligning the U.S. with the global “Schumpeterian” shake-up of the energy industry.
The Biden administration should ultimately be a boon to both domestic and international policy, in which greater certainty, consistency and co-operation with respect to U.S. global trade policy would be a game changer. This is not to imply that we expect Biden to turn “soft” on China, but more that the “rules of the road” will be clearer, with fewer unpredictable changes in direction, and greater alignment with traditional allies.
CHINA: The New Year will mark the start of China’s new five-year plan, which has a clear “growth” agenda — a reversal of the “deleveraging” goal of the previous five-year plan. While China’s focus is their domestic economy, their plan will nevertheless support global economies that export raw materials and equipment needed by China, helping to fuel growth in many of the world’s cyclical sectors.
As the world gratefully moves into 2021, we see plenty of reasons to be optimistic.
A more synchronised economic recovery
The global economy is likely to see both developed market (DM) and emerging market (EM) growth accelerate in 2021. This has not occurred since 2017, which marked the beginning of a period of divergent economic outcomes due to Chinese financial deleveraging, a manufacturing recession, global trade disruption and tightening financial conditions, as the Federal Reserve raised interest rates and the U.S. dollar surged.
Critically, the world’s two largest economies are both focused on increasing domestic demand and implementing an agenda for structural medium-term investment.
Consumers will reach a crossroads in the spring of 2021
POSITIVES FOR CONSUMPTION GOING INTO 2021, ESPECIALLY COMPARED TO THE 2008-2009 RECESSION:
Source: Haver, 20 November 2020.
Source: Bloomberg, Macrobond, US Census Bureau. Data as of 3 December 2020.
NEGATIVES FOR CONSUMPTION GOING INTO 2021
Surging cases of the virus in western developed nations, combined with a lack of further fiscal stimulus in the U.S., may reverse the positive trends for consumers, especially as unemployment remains elevated.
A more intangible variable is consumer sentiment or, as Keynes put it, “Animal Spirits.” After the initial shock from the virus in March and April, U.S. consumer sentiment remained robust as people saw continued improvement in the economy and enjoyed massive income support from the government. The question is whether the recent surge in the virus and Donald Trump’s loss in the U.S. presidential election are weakening these spirits. The latest Michigan Consumer Survey data showed a sharp drop in expectations among Republicans and only a negligible rise in expectations among Democrats. Since the country is roughly evenly split, a deterioration in sentiment among Republicans—if it results in less robust spending—could lead to a softening in U.S. consumer spending.
Business activity and capex to pick up in 2021
As with the consumer, there are a number of reasons why we expect both manufacturing and capex activity to accelerate in 2021.
Source: Datastream, MSIM, Bloomberg. 3 December 2020.
China’s 14th Five-Year Plan focuses on domestic growth
HEAVY CAPEX SHOULD SPUR SHORT-TERM GROWTH
China’s 14th five-year plan for the 2020-2025 period outlines a road map for growth in the medium term, but also provides insights into how China is likely to stimulate growth over the next 12-24 months. Capex will form the base of that strategy, as China looks to scale up investment in transport (intercity rail and urban transit), technology (5G networks, artificial intelligence and data centres, industrial internet, inter-city high-speed rail) and new energy (ultra-high voltage power and electric vehicle charging stations).3 The size of this package is expected to total around US$1.4 to US$2.5 trillion (RMB 10 to 17 trillion), invested over the next five years through 2025, according to CCID Consulting.4
CHINA’S MEDIUM-TERM FOCUS: A SHIFT TO QUALITY GROWTH
The 14th five-year plan emphasises a shift from quantity to quality of growth, to the point where the long-standing quantitative guidance on growth has been removed from the statement, creating a stronger focus on productivity and self-sufficiency. We outline the five (out of six) key pillars that are likely to serve as the clearest near-term economic growth engines.
Forecasts/estimates are based on current market conditions, subject to change, and may not necessarily come to pass.
Outlook: We expect equities to outperform in 2021
With diminishing global policy uncertainty and a constructive outlook on growth, we expect equities to outperform fixed income in 2021. We think this background will support the VIX moving back into a more subdued range, with implied volatility likely to fall back below 20 in 2021.
Within our equity allocation, our portfolio has a tilt towards cyclicals and value—we are overweight the Russell 2000, the DAX, financials and Latin America—while in fixed income, we are underweight rates.
One risk we are keeping an eye on is high-equity valuations. By traditional metrics, equities are overvalued. If they were to adjust to more normal levels, the timing would be very difficult to anticipate. Moreover, history shows that when it occurs, it can lead to substantial negative volatility.
Source: MSIM GBaR team, as of 5 January 2021. For informational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The tactical views expressed above are a broad reflection of our team’s views and implementations, expressed for client communication purposes. The information herein does not contend to address the financial objectives, situation or specific needs of any individual investor.
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