The Road to Recovery
In the first of two articles, mozamil afzal, global chief investment officer of EFG Asset Management, projects the likely investment scenario for 2021 after the unprecedented and unusual circumstances of last year
The challenges and acceleration of trends that 2020 brought about were clearly hard to anticipate. Despite the wild ride experienced last year, asset-class performance overall was healthy. World equities returned 12 percent in local currencies last year, which would have been a satisfying performance even without the pandemic uncertainty swaying markets. Inevitably some predictions for last year – which had been made at a time when the words “Coronavirus” and “lockdown” were in few peoples’ regular dialogue – were derailed. With 2020 now in the rear-view mirror we can draw attention to predictions and preferences that we think will shape investment decisions, themes that are valid not just for the first few months of the year but ones that can flourish across 2021.
We expect to see a synchronised global growth recovery, though the path is not likely to be smooth. The Asia-Pacific region, led by China, was the first to experience the Covid-19-related downturn in 2020 and has been the first to recover. Not only has the region managed to tackle the virus better than others, but it’s also been helped by a weaker dollar and strong demand for health supplies and technology. We project the region to continue to lead the way in 2021, but other countries will play catch-up and move back into positive growth territory for the year. On average, we expect global growth for the year to be ahead of trend. However, the trajectory of growth is dependent upon a range of factors.
The speed at which vaccines will be deployed will be a key driver of how quickly economies can get back on track; those able to act faster with broader deployment are likely to see stronger growth. Meanwhile many countries still face severe lockdown restrictions and new variants of the virus have emerged, so the extent to which restrictions are eased will also play a role. Most important of all, recovery will depend on the degree to which business and consumer confidence returns when emerging from lockdowns.
Consumer spending on entertainment, travel, concerts and sporting events has been particularly badly hit. As a result, savings have been built up. The evidence from countries that have opened up after the virus has been successfully contained (such as China and New Zealand) is that these savings are quickly run down again, with spending especially strong in areas on which it was not possible to spend during lockdowns. In the second half of 2021, we therefore expect a smoother path for growth in the developed economies as the virus subsides and confidence builds.
As already mentioned, the pandemic has changed consumer-spending habits and we believe that this will be a big theme for the year, with larger structural changes taking shape. The most significant will be the move online to digital sales channels. In the UK, the first wave of Covid-19 saw as much as one third of retail spending taking place online – up from a fifth in 2019. There, as in the US, the move to online and digital sales has been a slow-burn phenomenon, but thanks to the pandemic acting as a catalyst we’ve seen around six-to-seven years’-worth of growth in the last 12 months. We think that trend is unlikely to reverse, especially as online shopping has become somewhat easier, while the high-street shopping experience has been compromised by store closures and residual health concerns.
2020 saw a plethora of US companies – particularly consumer techs – go public, with investor appetite for new initial public offerings still appearing healthy. The IPOs show that consumer services are undoubtedly a very big aspect of the trend towards the adoption of digital solutions. Indeed, it’s in this area that the rebound in consumer spending is likely to be most apparent as 2021 evolves.
Governments clearly had a big role to play in the pandemic response and their spendings have surged. The worry, as Milton Friedman quipped, is that “there is nothing so permanent as a temporary government programme”. Given the ballooning deficits, there may be some pressure for governments to act in a more fiscally responsible manner; however, scaling back their pandemic responses is easier said than done. Governments will toy with the idea of raising taxes, but we think it’s unlikely in 2021 and would be a mistake. Thus, government budget deficits look set to remain high for at least several years, but it would be hazardous to believe that this will be a permanent situation. A better route to reducing the deficit size is getting the economy to grow again, with more people returning to employment and alleviating the need for unemployment insurance and other supportive measures.
The more interventionist role that governments have adopted as a result of Covid-19 may well extend to other areas in 2021. This leads on to another of our key themes, which is that of big tech consolidates. Last year, technology was one of the biggest drivers of market gains, though big tech peaked around August as regulation worries and the pivot towards value investing took hold. With governments stepping up their efforts to regulate the power of these companies – and with the Washington riot adding further impetus to US lawmakers – one option would be to put a ring around the companies, enforcing heavy regulation while still keeping rivals at bay, effectively making them regulated monopolies.
Another option which would be particularly interesting is the possibility of breaking up the big tech companies. This could provide an opportunity to unlock nascent shareholder value, with the individual companies proving more valuable and there being less possibility for innovation to be stifled. The penetration of online companies in China is far greater than in the US and this could mean a more aggressive stance by Chinese authorities. There will be uncertainty, but as with the US a break-up in some of the heavyweights may not be a bad thing.
In contrast to the possibility of breaking up big tech, attention will turn to Joe Biden and how he goes about re-building bridges that his predecessor destroyed. President Biden will clearly have a different style from that of Donald Trump. He may well use Executive Orders to elicit swift change in some areas: re-joining the Paris Climate Agreement and the World Health Organisation, for example. But Biden’s likely more consensual, cross-party, multilateral approach will bring slower, more solid improvements. This will be welcomed by US businesses and financial markets and, we think, the international community. As far as China is concerned, 2021 marks the 100th anniversary of the Communist Party’s formation, an anniversary that the country would presumably like to celebrate peacefully.
Although the world continues to evolve towards a tripolar arrangement, with supply chains more concentrated within large regional groupings, it’s unrealistic to think that China and the US can isolate themselves from each other. China imports more electronic integrated circuits than oil; and those electronic imports rely to a great extent on US technology. Meanwhile, the experience of the last four years shows clearly that it’s fanciful to imagine that America can re-engineer quickly the already-established manufacturing industries that remain in China.
The possibility of breaking up the big tech companies could provide an opportunity to unlock nascent shareholder value