Upbeat feel on economy despite pandemic damage
Sharemarkets ended 2020 in much stronger shape than almost anyone would have expected months ago.
Having been down 33.9 per cent at one point, world shares rallied more than 70 per cent and finished the year a stunning 16.8 per cent higher than where they started 2020.
The New Zealand sharemarket made similar gains, rising 14.5 per cent for the year, well above the 25-year average return of 10.1 per cent.
It wasn’t all one-way traffic; European shares managed only a 2.4 per cent gain in 2020, and the poor old UK market slumped 14.3 per cent.
Virus-related news is still getting uglier by the day, with everywhere from Germany to Japan reporting record daily case numbers. The death toll in the United States is approaching 350,000, while all the primary schools in London will start the term next week remotely.
But looking out a little further, the global economy is expected to gain momentum over the next two years. The OECD projects global GDP will return to pre-pandemic levels by late 2021, while the International Monetary Fund sees 2021 output only marginally below that of 2019.
Vaccine progress, more effective tracing and isolation, as well as behavioural adjustments from people and businesses are all expected to help suppress the virus. This should allow restrictions to be gradually lifted and — along with ongoing support from policymakers — activity should rebound.
Aggregate US corporate earnings fell 13.6 per cent in 2020 and are expected to rebound 22.1 per cent next year. This would see earnings for calendar year 2021 about 5.5 per cent higher than that of 2019.
NZ has entered the new year in solid economic shape. Fonterra’s dairy payout forecast rose twice in recent months and is tipped to be about 50c up on the 10-year average.
The housing market is extremely buoyant, with prices up some 15 per cent last year and little sign of any slowing. This only exacerbates some of our social issues, but from a purely economic perspective it has a good effect on activity and spending.
Business confidence has not only returned to pre-Covid levels, but the ANZ Own Activity index is the strongest in more than two-and-a-half years. That bodes well for growth in 2021, as this is one of the best indicators confidence.
Finally, unemployment hasn’t risen nearly as much as expected.
Reserve Bank forecasts suggest it will peak at 6.4 per cent this year, a much more modest high than predicted six months ago. Some economists don’t believe it will get out of the fives.
On the other side of the coin, tourism will remain challenged. The summer period is crucial and intrepid local travellers probably won’t be enough to offset the usual influx of international visitors many parts of the country are used to seeing.
The NZ dollar is likely to remain strong, which could be a headwind for some exporters. This is merely the downside of our robust economic position, as well as buoyant sentiment across global markets.
The currency rose more than 5 per cent in 2020 on a trade-weighted basis, rising strongly against the US dollar but falling against the Australian dollar and the euro.
The low interest rates are unlikely to change soon, particularly for shortterm rates controlled by central banks. However, we might see longerterm interest rates rise modestly as the economic outlook improves.
This is unlikely to derail the recovery, although maybe it’s not a bad time to think about locking in some of those attractive fixed mortgage rates, just to be safe.
Despite this glass half-full view, investors shouldn’t get complacent. Markets have performed much more strongly than almost anybody predicted in recent months, and further volatility is inevitable.
Should that occur, it could create some attractive opportunities for long-term investors.
Most of us might still be on holiday, but financial markets will get right back to business over the next couple of weeks. The US state of Georgia holds a run-off election for two
Senate seats tonight, which will determine control of the chamber as well as the level of influence President-elect Joe Biden will have on policy change in 2021.
Across the Atlantic, British businesses start the new year grappling with the implications of Boris Johnson’s Brexit deal, which was struck on Christmas Eve.
The global corporate reporting season is also about to kick off, which should give us some important insights from the world’s biggest business leaders.
This year is hopefully shaping up as one of normalisation. We should see gradual progress towards a reopening of many economies in the next six months, allowing some more economically sensitive businesses, and those that have been hurt most by the pandemic, to recover.
This doesn’t mean we should abandon the companies and sectors that performed so well for us in 2020.
However, it does provide an opportunity for investors to take a more positive view on some of those that had a challenging year, and which might be beneficiaries of a more “business as usual” 2021.