LONDON, BOSTON, HONG KONG, 08 December 2020 – State Street Global Advisors, the asset management business of State Street Corporation (NYSE: STT) has today published its 2021 Global Market Outlook, predicting an ongoing test of markets’ resilience as the world faces the prospect of further turmoil related to the COVID-19 pandemic, against a backdrop of fiscal, economic and political volatility.
Despite challenges, some positives remain, including a return to growth at the end of 2020 as well as increasingly hopeful prospects for a scalable vaccine and the eventual re-opening of global economies. Ultimately however, and even with promising indications of the imminent availability of a vaccine, markets now face the prospect of a short-term burst of growth, followed by some uncertainties, as policymakers attempt to wean economies off the monetary and fiscal stimulus which has helped sustain markets thus far.
Amidst this environment, State Street Global Advisors favors growth and quality assets, particularly those in the US and China, which offer some upside risk for investors.
“While we are very comfortable with our expectations for a strong economic rebound in 2021, we are increasingly focusing our sights on everything that comes after that surge,” explains Rick Lacaille, global chief investment officer at State Street Global Advisors. “A combination of alertness and agility is most likely to reward investors, as recession gives way to a powerful but temporary rebound, followed by an unknown new baseline of growth.”
Recovery continues
State Street Global Advisors’ mid-year GMO, released in August 2020, compared the COVID-19 pandemic to a relay race, with multiple overlapping stages. Global economies have now transitioned from a successful stage one (the injection of monetary and fiscal stimulus) to stage two – an economic reopening. The stimulus packages deployed during stage one were, given the circumstances, not particularly well-targeted, but were large and swift, succeeding in achieving their primary goal – putting a floor under markets.
Now in stage two, governments have largely implemented less onerous restrictions than seen during the Spring which has allowed economies to operate at a comparatively higher level. Quantitative easing (QE) has been one of the key factors buoying equity markets in 2020, though earnings are yet to come through. Furthermore, and in contrast to what we have seen in the past, QE seems to be capping bond yields despite rising expectations for inflation.
With the outlook for a vaccine increasingly positive and the first vaccinations rolling out imminently, an exit from stage two looks increasingly likely. While short-term market buoyancy is likely as economies open fully and restrictions on movement are lifted, the longer-term outlook is less certain.
State Street Global Advisors Deputy Global Chief Investment Officer, Lori Heinel, commented, “At some point, economies will need to transition back to autonomous growth, independent of monetary and fiscal stimulus. How perfect or how imperfect a substitution growth will be for stimulus remains to be seen. The adjustment is certain to be complex, and it is very likely to cause some market turbulence along the way. In short, 2021 is a year where the resiliency of governments, economies and corporates will be retested.”
United States and China most likely to outperform
Despite these challenges, investors will see opportunities in markets next year, most likely in the United States and China. China was the first nation to see COVID cases, but the strict and far-reaching control measures implemented in the country seem to have proven effective at helping to contain the virus, allowing the recovery process to continue largely uninterrupted thus far and rendering China fairly impervious to the possibility of renewed shutdowns.
“China will be the only large economy to see positive GDP growth in 2020, likely around 2.5 percent; though this positive outlook should be tempered with a note of caution over the longer term given high debt levels, deteriorating demographics and ongoing geopolitical tensions potentially posing challenges,” said Kevin Anderson, head of Investments, Asia Pacific at State Street Global Advisors. “We expect earnings growth in China to be especially resilient, and the Chinese growth and consumer stocks most appealing. We also believe that Chinese fixed income assets and the renminbi are very attractive, given the yield pickup and because we see room for further currency appreciation.”
The US meanwhile is forecast to face less marked GDP contractions than many other developed economies, at an expected 3.7 percent, compared to more acute declines of 9 percent in the UK and 7 percent in the eurozone. Joe Biden’s recent election win has sparked new speculation on the scale, timing and characteristics of further stimulus packages. Our outlook is that a smaller-but-sooner support package is most likely, somewhere between the $0.5 trillion proposed by Senate Majority Leader Mitch McConnell and the $2.2 trillion proposal from Speaker Nancy Pelosi. A larger-than-expected package could trigger further questions about the potential for rising inflation.
Other economies face mixed outlook
Beyond the US and China, the wider global picture is mixed. The UK looks like a notable underperformer – suffering an 11 percent plunge in year-on-year GDP during the first three quarters of 2020, compared to a 5.9 percent fall for the German economy over the same period. With a comparatively lackluster response to the COVID-19 outbreak and the impending Brexit deadline with no agreement yet in place, the UK faces rather unfavorable circumstances for near-term economic performance.
While currently facing enhanced COVID-related restrictions, the Eurozone has deployed a cohesive and supportive macro policy response to the pandemic. Although a fourth quarter GDP contraction seems likely for the region, we remain hopeful that a sufficiently counter-cyclical fiscal policy can help combat internal frictions and troublesome institutional limitations to growth in 2021.
Emerging markets (EM) face a multitude of varied outcomes. A vaccine for EM economies may deliver disproportionate gains – given emerging markets’ level of dependence on exports generally and commodities in particular. Investors should weigh this positive outlook against economies’ underlying macroeconomic and institutional fundamentals to identify the best performers.
Quantitative easing and the prospect of inflation
Though we caution investors to be mindful of the outlook into late 2020 and beyond, as markets wean themselves off the stimulus packages rolled out this year, monetary policy remains generally supportive around the globe for a while yet. The Fed’s adoption of an average inflation targeting framework (AIT) has proven influential and precipitated additional monetary easing in the US and around the world, including in Canada, Australia and the UK. We have raised our inflation forecasts for both this year and next, albeit only modestly. The combination of more QE and low interest rates stand to be a powerful combination to stop bond yields from moving up too much, but one of the most difficult questions to answers during this pandemic is whether COVID-19 will prove an inflationary or deflationary shock over the medium term.
“Uncertainties continue to prevail on a number of fronts as we head into 2021,” explains Heinel. “We have many questions but few clear answers. To what extent will we see restrictions re-implemented in response to rising infection rates? Will additional QE lead to inflation? How will the policy landscape shift following runoff election for the US senate? Will the UK secure a Brexit deal and, if not, how will it manage the transition? And of course, the ongoing question of how and when we’ll see a vaccine rolled out widely persists. While the world awaits the rollout of a medical treatment for COVID-19 and as economies brace themselves to face the challenges ahead, we continue to believe the US and China will weather the looming test of global resilience best.”
ENDS
Michel Chau
+44 (0) 7500 682982
mchau@statestreet.com
Expiration Date: 31 Dec 2021
Tracking Number 3356416.1.1.GBL.RTL