As I am, you are also likely looking forward to the new year… so long 2020 with your horrible global pandemic, seemingly endless politics and deadly social unrest. Hello 2021! The spirit of 2021 was quickly turning cheery as I wrote this month’s Investor’s Edge column near year end. Coronavirus vaccine daily delivery began worldwide by the tens-of-millions and Congress was just days away from a second 2020 emergency Covid Relief package. This is sure to help people in need, offer assistance to businesses and provide overall economic stimulus.
With the new year comes an old tradition – my annual investment market and economic outlook. Last month I shared my expectations for the U.S. stock market and economy. This month I offer my international outlook.
2021 GLOBAL MARKET OUTLOOK
2020 was both a surprise (in more ways than one!) and not a surprise. As I wrote in my 2020 OUTLOOK, the world markets would be “resilient amongst uncertainty.” Looking forward, the global economies are in the early post-recession recovery phase of the cycle, which implies an extended period of low-inflation, low-interest rate growth that favors stocks over bonds. One of the biggest surprises of last year is that global equities, from late November, gained around 14% since the beginning of the year—an outcome few would have predicted or expected during a global pandemic. With the U.S. election behind us and effective vaccine deliveries on the way, bullish investors pushed the S&P 500 Index to record highs into year’s end. In last month’s column highlighting my 2021 U.S. Outlook, I offered a moderately bullish stock market forecast. I expect investors will experience “Less stress and more fun in 2021.” This prediction is based on my view that stock supporting catalysts remain. Generally, interest rates are likely to remain near all-time lows as the Federal Reserve has recently reiterated its near zero interest rate policy. Consumer confidence is likely to improve. Retail sales, especially via e-commerce, are strong, corporate earnings are rising and investor sentiment is high as the TINA effect (There Is No Alternative) prevails.
Foreign focus in 2021 should be on emerging markets (EM). From an international equity allocation point of view, I recommend an overweight position to EM stocks. I see them as principal beneficiaries of a vaccine-led global economic upswing in 2021. Other positives I think will benefit EM stocks are a likely flat to weaker U.S. dollar and a more stable trade policy under the Biden administration. Secondly, I expect strong stock gains from Asian country stocks (excluding Japan). Asia ex-Japan countries have effectively contained the virus – and are further ahead in the economic restart. I expect the region’s tech orientation allowing it to benefit from structural growth trends. A surprise stock market move may come from European equities. However, I see unique risks in Europe that may stifle stock gains. The Eurozone has relatively high exposure to financials pressured by low rates. It also faces structural growth challenges, even given potential for catch-up growth in a vaccine-led market and economic revival. Germany, France, Italy, Spain and the UK are all embarking on new nationwide lockdowns. Their recoveries in 2021 will likely be boosted by the huge monetary and fiscal stimulus policies adopted by their central banks governments.
Overall, these are my asset class implications for 2021:
- Equities should outperform bonds.
- Long-term bond yields should rise, though with steeper yield curves likely limited by continued low inflation and central banks remaining on hold.
- The U.S. dollar will likely weaken given its countercyclical nature.
- International stocks to outperform given their more cyclical nature and relative valuation advantage over U.S. stocks. Overweight EM.
- The rotation to value stocks continues but they do not outperform the growth class.
Global Economy in 2021
The consensus forecast for global economic growth for 2021 is 5.4%. I expect more. Following a steep decline in early 2020, the world economy enjoyed a sharp rebound that began in May and remains on track to surpass pre-pandemic GDP levels by the end of 2021. This sets the stage for strong post-recovery growth this year. Emerging markets, notably China and India, along with the re-opening of Europe, leads me to expect a macro global economic growth outlook that exceeds consensus. I am less bullish on Europe in 2021. After declining by 3.8% and 11.8% in the first and second quarters of 2020, the Eurozone’s real GDP rebounded strongly by 12.7% in the July to September quarter, making up about half of the contraction in the first half of the year. In summary, a global GDP growth rate of 6% or higher is my prediction.
Whether global investments appreciate greatly or economies rebound strongly, my hope for 2021 is the world’s population has a healthy, virus-free year!
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Happy New Year!
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