What will economic recovery look like in 2021 and what will the year hold for investors as we, vaccine permitting, leave the covid pandemic behind?
At BNP Paribas, the thinking is that Europe faces a more daunting task to rebound from the collapse in GDP during 2020 than the US.
BNP points out that while the US is expected to return to its pre-pandemic level of GDP by the end of 2021, a full recovery is not forecast for the eurozone until the end of 2022.
One reason for the slower recovery in the eurozone is the limited scope for the ECB to ‘do more’ in a way that has a meaningful impact on growth or inflation.
In 2021, the central bank is expected to adopt a new inflation target closer to the US Federal Reserve’s symmetric 2% target, recalibrate its quantitative easing programmes, adjust its longer-term refinancing operations to possibly allow banks to borrow more at an even cheaper rate for longer, and perhaps make a small cut in the deposit rate.
While BNP notes that such moves should be helpful, it points out that with interest rates already at near historic lows in many markets, banks are reluctant to lend and businesses are loath to borrow.
The conclusion is that only once a vaccine is widely available and governments lift restrictions that the region’s economies can hope to return to trend-rates of growth.
Positives for emerging markets
While emerging markets suffered similar declines in GDP to developed markets following the lockdowns, they deployed far less fiscal or monetary stimulus. As BNP highlights, this means they face fewer risks from higher debt burdens than the US or Europe.
“The (GEM) recovery into 2021 should be aided by what we expect to be robust growth in both the US and China. Domestic demand-orientated fiscal stimulus in the US should pull in exports from many emerging markets. China’s recovery, while perhaps less commodity-intensive than in the past, should still support activity in the wider Asian region. Emerging Europe, the Middle East and Africa may benefit less since their exports are oriented more towards a slower-growing Europe,” a BNP source said.
He added: “Emerging market valuations relative to developed markets appear quite reasonable and we expect to see emerging markets make up some of their underperformance from the last decade.”
Fixed income
Netherlands-based investment managers NNIP remains positive on credit over the medium term, given the expected strong economic recovery in the second half of next year.
The hardest-hit sectors with the highest default probabilities could stand to benefit and these are mostly in the high yield space.
This is the reason NNIP decided to retain some exposure to this segment.
In the commodities space, the company has decided to close its overweight in gold, not because it no longer like precious metals, but because it wants to be better positioned for the post-pandemic cyclical recovery and the increasing focus on new-energy investments.
NNIP hopes to achieve this by increasing exposure to silver, which is used in car catalysts and solar cells. The asset manager believes the medium-term outlook for precious metals in general should continue to be boosted by accommodative monetary policies, the weakening US dollar and a recovery in jewellery demand in China and India.
In the Eurozone, where NNIP still holds an overweight position, the ECB has increased and extended its Pandemic Emergency Purchase Programme in line with expectations.
The company believes this development, the post-Brexit trade deal, and the agreement on the EU budget and recovery fund will help Eurozone equities to maintain some positive momentum.
The year for 5G?
As far as investment themes go, Robeco believes 2021 could be an inflection point for 5G.
Consumers have shown a willingness to subscribe to 5G services, particularly in Asia which is leading in 5G adoption. The subscriber base is rapidly expanding from virtually nothing two years ago.
Robeco can see exciting investment opportunities among owners of digital infrastructure with 2021 being a key year to increase 5G coverage and quality.
“Companies owning digital infrastructure at critical points in the network will benefit, because their assets are increasingly in demand and cannot be avoided when building the 5G network. Selected cellular tower, small cell, fibre cable and data centre owners are key beneficiaries at this stage” according to Sam Brasser, an analyst at Robeco.
He adds: “We are confident that innovative growth companies will look at 5G, see its capabilities, and develop use-cases and applications for it. Comfortably invested in digital infrastructure now, we are excited to see which companies are able to unlock 5G’s potential for all our benefits.”
Staying on the ‘tech theme’, BNP Paribas expects innovation and disruption technology to provide good investment opportunities in 2021.
“Remote working has become the norm, setting off greater demand for technology and innovative solutions ranging from tele-conferencing to cloud computing access. E-commerce has taken off and increasingly, the possibilities of e-medicine are attracting interest”.
The BNP source adds: “Big data, artificial intelligence and data analytics are seen more and more as essential tools to manage the pandemic and to solve major economic, demographic and societal questions”.
