Most of us are understandably hoping to see 2020 in the rearview. The caustic impact of Covid-19 is unprecedented, with lives and businesses tragically lost. The blow to the world economy has been extraordinary: the latest global outlook from the IMF forecasts a contraction of 4.4% for the whole year.
However the dose horribilis which has certainly been 2020 is coming to an end with a positive air. The true turning point has been the scientific side.
Pharmaceutical giants, scientists and governments have collaborated and galvanized their efforts like never before, in an attempt to create a vaccine against the coronavirus and, thankfully, we currently have no less than three confirmed contenders. While this certainly helps the outlook, many challenges remain. Below, we highlight the areas that we believe will shape 2021 and beyond.
1) A vaccine against the coronavirus: The news everyone was waiting for came in early November. BioNTech and its partner Pfizer, and shortly thereafter Moderna and the partnership between the University of Oxford and AstraZeneca each declared successes in vaccine development. The joy in the markets was clear, with strong earnings.
Although the end of the pandemic is beginning to be seen, there are still many obstacles, mainly the logistics of a rapid and successful deployment of the vaccines. This is likely to take longer than expected and potentially let’s not see a mass vaccination for a few months yet, but herd immunity could be in the offing by the end of 2021.
It was fortunate for investors that Joe Biden’s victory coincided with the advance on the Pfizer vaccine.
If anything, fewer infections means more activity. The global economic engine can get back on track, and the most decimated sectors – such as travel, leisure, hospitality or retail – should hopefully enjoy a steady rebound as normalcy returns.
2) Ecological recovery: One of the main positive aspects of 2020 is the renewed interest in the environment and the way in which the crisis could accelerate the energy transition. It appears that policy makers and governments will use the pandemic as a reason to bolster their efforts to tackle climate change.
The EU recovery agreement includes € 550 billion for green initiatives, the biggest climate promise ever made. On the other hand, China – the world’s largest producer of CO2 emissions – surprised markets by declaring its intention to be carbon neutral by 2060.
In addition, Germany raised 6.5 billion euros from your first green bond and France aspires to be the first large low-carbon European economy. Meanwhile, the United Kingdom plans to issue its first green bond in 2021.
Green bonds, integration of ESG factors, impact and carbon reduction will be vital elements for investors
At the same time, greater international cooperation is needed on issues such as carbon pricing. We believe that the crisis may influence the speed of the energy transition for the better and that Covid-19 has accelerated and intensified investor demand for more transparent and sustainable products.
Looking to the future, green bonds, the integration of ESG factors (for environmental, social and governance sustainability), impact and investment strategies dedicated to reducing carbon will be vital elements for investors.
3) The new US administration: It was certainly lucky for investors That Joe Biden’s victory in the US presidential election coincided with the advancement of the Pfizer vaccine, as the combined news sent a wave of euphoria through the markets.
However, next year, investors and markets they should expect a dramatic change in tone of voice coming from the White House. The next American president has already deployed his four pillars in the short term: the response to the pandemic, the economy, racial injustice and climate change. But in the most immediate setting we anticipate stricter lockdowns due to the pandemic and, consequently, weaker economic data for the last three months of the year and the first quarter of 2021.
The EU seeks formulas to allow a trade agreement with the United Kingdom to be ratified after the deadline
On the other hand, it appears that the Republicans will retain the majority of the Senate and this could go against very progressive tax and spending policies by 2021. Biden hoped to introduce a major fiscal stimulus in the medium term, which would help fuel expansion and reduce reliance on monetary policy. But it appears that the world’s largest economy will need to rely on central bank support for some time to come.
In world politics, we anticipate that the US will once again adopt a much more multilateral approach. This will likely include a return of support for international groups such as the World Health Organization (WHO), the World Trade Organization (WTO), and a new commitment to the Paris Agreement.
As for the protracted trade war with China, we do not expect a quick removal of tariffs, but we do expect a new, more constructive engagement.
4) Brexi: The UK-EU talks are a source of uncertainty, but on December 31 at 11:00 pm London (midnight in Brussels), the transition period ends.
According to the President of the European Commission, Ursula Von Der Leyen, some progress has been made in certain areas in relation to post-Brexit trade. Since time is fast running out to secure a deal, it seems like the EU seeks formulas to allow a trade deal with the UK to be ratified after the deadline and thus avoid a no-deal Brexit.
Securing an agreement means circumvent a future relationship based solely on WTO terms, as well as avoiding the additional costs related to the division and allowing broader agreements, for example, in the equivalence of some financial services. However, it is worrying that only about 5% of UK companies They have said they are prepared for the new business conditions.
The markets have a lot of good news, yet they still depend on strong political support
Looking to the future, we start from financial markets that have benefited from monetary and fiscal support in 2020. Furthermore, the planned development of a vaccine has allowed investors to see this year’s economic catastrophe. By 2021, there are reasons for optimism as the world drifts away from the coronavirus nightmare.
The markets have a lot of good news, and yet continue to depend on significant political support. Future returns on investments need good news about the outlook to translate into increased business confidence, strong job growth and continued recovery in corporate earnings.
We believe that the macro issues we discuss here certainly provide the opportunity for this to happen.
***Chris Iggo is Investment Director of AXA Investment Managers