Market outlook: Five key themes in 2021

2020 was an unusual year, to say the least – loose monetary policies and government handouts had spurred the US equity market to rebound, climbing higher despite the devastating damages COVID-19 inflicted on global economies.

Tech stocks, in particular, have reached new highs with these companies benefiting from more people working from home and spending more time indoors. But standing in stark contrast were traditional economy stocks: these businesses have largely suffered from the overall economy contracting, while some have shut down permanently.

Here are five forecasts for the global economy in 2021:

Firstly, we think a V-shaped recovery in global economies is on the horizon. Market consensus has it that the time frame of recovery is closely tied to that of mass vaccination campaigns.

According to Imperial College London’s research on the first wave of the pandemic, as the age of infected individuals increased by eight years, the virus’s infection fatality ratio (IFR) would double.

For individuals under 40 years old, the IFR was lower than 0.1%, but it surged to greater than 5% among those aged over 80[1]. The institute’s calculations also suggested that the IFR for infected persons aged between 50 to 55 was around 0.38%, so vaccinating those aged 50 or above can greatly alleviate the burden the pandemic has put on intensive care units1. This is also expected to gradually flatten the curve, which in turn will quicken the pace to restart the economy. 

According to the United Nations, as of 2020, close to 1.9 billion, or 24.2%, of the 7.8 billion global population were aged 50 or above[2], [3].

In 2021, the combined output of COVID-19 vaccines manufactured by Pfizer, Moderna and AstraZeneca will reportedly reach around 5.3 billion doses, which can be administered to between 2.6 to 3.1 billion people[4]. We believe the pandemic should subside considerably if we also take into account additional shots developed and distributed by other producers and Chinese manufacturers.

Moreover, household savings in developed countries have swollen over the past few months as working from home has gone mainstream. In our view, as soon as the pandemic is brought under control, pent-up consumer spending will be released, putting global economies on a V-shaped recovery trajectory.

Secondly, we think the US dollar will continue to weaken. This is down to the Federal Reserve’s balance sheet and M2 money supply ballooning under the former’s ultra-loose monetary policies and government handouts rolled out to prop up the economy amid the pandemic.

And if future policy directions are guided by the Fed’s chair Jerome Powell and, potentially, Janet Yellen, who has recently gained US President-elect Joe Biden’s confirmation as the next Treasury Secretary, the current policy setup will likely become the norm given their dovish stance, which will continue to weigh on the dollar’s strength. Historically speaking, a weak dollar has benefited Asian economies and stock markets.

Thirdly, we think the return of inflation is no longer a remote possibility. The US’s current loose monetary policies have been unprecedented, its level of aggressiveness unseen in the global financial crisis back in 2008. The government’s cash handouts have also directly expanded the money supply, leading to the biggest growth in M2 in 60 years, with some economists warning against potential inflation risks[5].

Over the past decade or so, inflation rates in developed countries have been treading at low levels with many investors growing complacent with a low-inflation environment supported by accommodative monetary policies.

So if inflation does return, the returns on fixed-rate government bonds will be among the first to suffer.

As for equities, strong companies with more pricing power may see their profits grow if they are able to pass on the cost of inflation to customers. In the scenario where inflation picks up, we think the ability to identify quality companies is vital in equity investing.

Fourthly, we see value stocks becoming more favourable over this year. Growth stocks have significantly outperformed value stocks in the past two years. After the outbreak of coronavirus, especially, investors have stockpiled technology companies’ shares. So in a post-pandemic world, traditional value stocks will likely gain more appeal among investors.

Lastly, the US will maintain its diplomatic approach towards China. US President Donald Trump, with his “America First” policy during his time in office, has taken aim at Beijing in an attempt to narrow the country’s trade deficit with China. With the new Secretary of State Antony Blinken assuming office alongside President-elect Joe Biden in January, we think the US’s current approach towards China will not change fundamentally given the former’s hawkish stance.

In the eurozone, however, we don’t think now is the right time yet to forecast how the region’s policy towards China will be headed. While the EU’s leader, German Chancellor Angela Merkel, has taken on a relatively practical approach, it’s not known yet who her successor will be after she steps down next fall.

[1] Source: Imperial College London, as of Oct 2020

[2] Source: UN Department of Economic and Social Affairs, as of Dec 2020

[3] Source: Worldometer, as of Dec 2020

[4] Source: Nature, as of Nov 2020

[5] Source: CEIC, as of Jan 2021


This document is based on management forecasts and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. In preparing this document, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. All opinions or estimates contained in this document are entirely Zeal Asset Management Limited’s judgment as of the date of this document and are subject to change without notice.

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