Market Outlook – Feb 2021

23 Feb 2021

Markets continued to push higher during the final months of 2020 as positive vaccine trials were announced and investors started to believe that the rollout of vaccinations in 2021 would return the global economy back to something approaching normality. As a result, sectors that have been seen as ‘COVID-19 losers’ (such as travel & leisure, oil & gas and financials) started to perform strongly. Alongside the remarkably swift development of effective vaccines, the COVID-19-induced economic collapse and recovery would appear to be moving at ‘warp speed’ compared to previous economic cycles. 

A synchronised global economic recovery during 2021 is now anticipated, helped not only by the lifting of lockdowns but also the dual tail winds of pent-up demand and restocking. Globally, the number of companies seeing earnings forecasts revised up in comparison to those seeing downward revisions is high relative to history.

An increase in ‘mergers and acquisitions’ activity can be expected as private equity and strongly capitalised listed companies take advantage of cheap debt to consolidate sectors by acquiring firms with good market positions but compromised balance sheets.

Our feeling, therefore, is that equity markets can continue to move higher and those more economically sensitive companies which started to lead the markets higher in recent months will continue to do so.

However, there are some significant caveats.

Firstly, there is a distinct risk that one or more COVID-19 variants may materialise which require the reformulation of existing vaccines to ensure good efficacy and this could reduce the speed and scale of the recovery.

Secondly, policymakers are generally agreed that policy tightening measures, such as austerity and interest rate rises, were brought in too swiftly following the global financial crisis of 2008/9 and these errors impaired the subsequent recovery. The same mistake must not be repeated.

Thirdly, the consensus believes the outlook for inflation, in the medium term, is benign. This is crucial as low inflation helps anchor interest rates at low levels, which in turn are used to value companies. Any sustained increase in interest rates, as a result of higher inflation expectations, could have the twin effects of undermining corporate valuations and reducing economic growth. 

Policymakers will have to tread a fine line between allowing economic momentum to build a head of steam and ensuring investors remain confident that inflation will remain under control in the medium term. This will become increasingly difficult as the year progresses, as year-on-year comparisons of inflation could come in significantly higher than expected due to base effects at a time of strong global economic growth.

Overall, we remain constructive on the outlook for risk assets.

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