Optimism with a dash of caution – investment outlook for 2021

After a terrible year, the last quarter of 2020 provided some much-needed relief. Positive global news, on several fronts, helped financial markets turn in one of the best final quarter returns in history and brought hope of positive economic momentum continuing into 2021.

In Perpetual Private’s quarterly investment report for September to December 2020 we dig deeper into the performance of global markets and the economy and examine the issues likely to affect performance in 2021.

COVID clouds remain, but sunshine is spreading

Continued positive news about vaccine efficacy, and the sight of vaccines starting to roll out in wealthier countries, gave a further boost to global equity markets towards the end of 2020. Australian equities returned 13.8% for the quarter, one of the best fourth quarter returns in history. This caused the ASX to finish slightly up for the calendar year and it’s now approaching the record high it set in February 2020. Global markets continued surging with the S&P 500 and Nasdaq both reaching record highs in November.

The COVID-19 situation remains volatile however and at the time of writing the US and UK and many other countries were still recording very high daily levels of infections and deaths. The emergence of several new mutant strains of COVID, which are more infectious and possibly more fatal, is also hampering the global economic recovery.

Global politics and economy improving

Despite the legal challenges, political ructions, and violent demonstrations, Joe Biden is now the US President. With the peaceful transition to a new administration and a flurry of executive orders relating to international relations, climate change and COVID-19 the world is adjusting to this new dynamic. The new administration has been warmly welcomed by much of the international community, which is hopeful that it will help the world return to more normalised international relations.

The way the US interacts with China will be closely watched as China’s increasing presence and confidence on the global stage continues to change geo-political relations. If the global community becomes closer, it will be more difficult for China to continue its divisive politics. China’s economy performed comparatively well in 2020, despite a strong dip in the first quarter, and it avoided a technical recession unlike most other parts of the world.

The UK’s tortured negotiations with the EU on Brexit finally came to a close late in 2020 and now both parties are getting used to the new reality. The combination of Brexit and a surge in COVID cases, in the UK particularly but also in Europe, is expected to continue to hamper the EU’s economic growth and recovery. The level of GDP in many large economies won’t reach pre-pandemic levels for at least 2021 and probably beyond.

Whatever it takes for economic recovery

With economies around the world still fragile, governments and central banks continue to do everything they can to give confidence to businesses and consumers and accelerate the economic recovery.

At its November 2020 meeting, the Reserve Bank of Australia (RBA) cut the cash rate to an historic low of 0.1%. The RBA continues to say that it intends to keep rates on hold for at least the next three years. Other central banks around the world are similarly committed to long-term low interest rates. This leaves many investors with little alternative but to put their money into riskier assets in search of greater return.

Governments globally continue their economic stimulus measures in order to boost their economies. The US finally passed its second stimulus package late in the quarter and the Biden administration is expected to further increase economic stimulus and also provide a big boost in terms of ‘green’ infrastructure spending. The way governments manage the withdrawal of this economic stimulus will be crucial in 2021. If they withdraw fiscal spending too soon, or too quickly, it could damage the recovery, but the longer they continue injecting cash the bigger the debt burden will be in years to come.

What now for your investments?

We approach 2021 with cautious optimism. The COVID vaccine rollout and the world’s increasing ability to live with COVID have boosted markets and the longer-term outlook looks broadly positive despite high virus numbers and new, more contagious strains. This is reflected in the very strong performance by financial markets in the final quarter of 2020 and the continuing positive start to 2021.

The virus is far from gone however, and there remain many factors which could hamper the global economy’s recovery. It’s likely that the economic and investment climate in 2021 will continue to be volatile, so it’s important to have the right plan in place to enable you to confidently weather any storms and continue progressing toward your long-term financial goals.