Four global investment themes for 2021
The recovery of global equity markets from the depths of the COVID crisis has been rapid and substantial, with the MSCI All Country World index (ACWI) 12.5% above pre-COVID levels. The spectacular rebound has been driven by: i) positive vaccine developments, lifting expectations for a recovery; ii) ultra-aggressive stimulus by the major central banks; iii) aggressive fiscal stimulus; and iv) COVID-19 accelerating the shift to new technologies.
Looking into 2021 we emphasise four global investment themes:
Theme #1: A strong global recovery, with leadership shifting from Asia to the US: five positives for the US are the vaccine rollouts, aggressive Fed, second-round fiscal stimulus, the housing boom and strong consumer fundamentals.
Theme #2: Central banks remain ultra-accommodative, cautious about prematurely removing stimulus: memories of the GFC and taper tantrum, commitments to reactive policy and higher inflation support dovish policy.
Theme #3: Inflation a question of when, where and how much, not if: massive monetary stimulus, strong recoveries and the push for inflation should lead to tight labour markets and, over several years, a move higher in sustainable inflation.
Theme #4: Persistent high valuations, with the risk of melt-up: PEs have re-rated by 3.3 points, reflecting depressed earnings and bond yields. Booming liquidity, rising confidence and a potential M&A cycle could drive a melt-up.
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