Greetings!
As the holidays and the New Year approaches, our attention turns to the joy of Giving and Gratitude! Each year it has become a tradition to donate a percentage of our revenues to charities recommended by our top clients, in their honor. However, it is equally gratifying to to see our clients utilize their "Charitable Giving Funds" to make generous gifts to the charities closest to their hearts.
As a reminder, this year only, 'The Coronavirus Aid, Relief and Economic Security Act' includes the special $300 deduction of donations made to charities during 2020. This is designed especially for people who choose to take the standard deduction, rather than itemizing their deductions, the cash deduction lowers both adjusted gross income and taxable income – translating into tax savings for those making donations to qualifying tax-exempt organizations.
2021 The Global Market Outlook
"We have a positive medium-term outlook for economies and corporate earnings. We’re in the early post-recession recovery phase of the cycle, which implies an extended period of low-inflation, low-interest rate growth that favors equities over bonds."
- Andrew Pease, Russell Investments
We believe that COVID-19 vaccine prospects are likely to make 2021 a year of global economic recovery. While markets have priced in a fair amount of the good news, more gains seem possible as corporate profits rebound and central banks remain on hold.
Key market themes - With the world in the early post-recession recovery phase of the business cycle, our medium-term outlook for economies and corporate earnings is positive. We believe that 2021 will feature an extended period of low-inflation, low-interest rate growth that favors equities over bonds. There are some near-term risks, however, such as investor sentiment, which has become overly optimistic following recent vaccine announcements. This makes markets more vulnerable to negative news, which could include renewed lockdowns in Europe and North America as virus cases escalate, logistical difficulties in distributing the vaccine and negative economic growth in early 2021—if government support measures are unwound too quickly. Geopolitics could also deliver negative surprises from China, Iran or Russia as the new administration of President-elect Joe Biden takes power in the U.S.
Our cycle, value and sentiment investment decision-making process scores global equities as expensive (with the very expensive U.S. market offsetting better value elsewhere), sentiment as overbought and the cycle as supportive. This leaves us slightly cautious on the near-term outlook, but moderately positive for the medium-term, with expensive valuations offset by the positive cycle outlook.
In the U.S., there likely will be two distinct phases to the path forward. The first—over the northern winter months—looks challenging, as COVID-19 infections explode across the country, leading to partial, localized lockdowns. However, once a vaccine is widely available, we believe that dislocated sectors (e.g., restaurants, travel and hotels) will bounce back strongly, likely in the second half of 2021. Meanwhile, the Federal Reserve (the Fed) continues to maintain an ultra-accommodative policy stance. Even with our expectation for a robust 2021, the Fed’s focus on generating an inflation overshoot should leave plenty of runway for the expansion to strengthen and broaden.
The three biggest challenges we see for markets are the concentration risk in major U.S. equity benchmarks—which have a composition skewed toward the stay-at-home mega cap technology stocks, moderately expensive valuations in equity and credit and an increasingly optimistic industry consensus.
In Europe, the second wave of virus infections has reversed the third-quarter V-shaped recovery, with the region on track to record negative GDP (gross domestic product) growth in the fourth quarter. The new lockdowns are working, however, with infections across the region having peaked in early November. We believe that Europe is poised for a strong post-vaccine recovery. The region is also more exposed to global trade than the U.S., and should be a beneficiary of a recovery in Chinese demand. Notably, after five years of underperformance, we expect the MSCI EMU Index to outperform the S&P 500® Index in 2021.
COVID-19 and Brexit uncertainty have battered the UK, with the FTSE 100 Index the worst performing regional equity market (by a wide margin) in 2020 to date. However, we believe it could be one of the better performers in 2021. The UK market is cheap relative to other markets and is overweight the financials, materials and cyclical sectors that should benefit the most from a global recovery.
The Chinese economy has returned to almost pre-pandemic output levels, which is a significant achievement, given the depth of its first-quarter downturn. We think that fiscal policy in China will remain supportive through 2021.
We believe that Japan’s rebound from the pandemic is likely to lag other developed economies, despite its less severe COVID-19 outbreak. This reflects the structural weaknesses that were in place before the pandemic, such as subdued consumption from its aging population.
Australia has controlled the virus outbreak better than most other countries and, with a relatively open economy, is poised to be a beneficiary of the post-vaccine global recovery. 2021 is likely to see an expansion of the Reserve Bank of Australia’s quantitative easing program.
In Canada, we believe that the country’s exposure to commodities—particularly oil—will benefit from a rebound in the global economy. While business investment may be slower to materialize, both the housing market and improving commodity prices will likely serve as foundations to an economic recovery.
