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2021, like 2020, has been a peculiar year, but we have made it through the first half. What should we be looking at to attain a better understanding of what is happening with the markets? Which are the most relevant economic forces in this context? Gregorio Gandini, economist and columnist for SupraWorld, explains to us the four essential elements that must be considered.

As expected, 2021 is proving to be a year as complex as 2020. The pandemic continues its global expansion, and new spikes and variants of the virus stand in the way of controlling the Covid-19 pandemic. What should we be observing to know what is going on with the economy? In such a peculiar and dynamic context, figuring it out may prove to be quite difficult. However, we should scrutinize closely some fundamental aspects that in one way or another affect investors’ decisions: the progress of vaccination campaigns, the volume of production of semiconductors, the behavior of commodities, and countries’ situations regarding taxes and inflation.

Vaccination Rate

It will undoubtedly continue to be a central aspect in evaluating each nation’s economic recovery process. The acceleration in the reopening of different sectors, which can be accomplished through higher vaccination rates, reduces investors’ risk perception. This leads to changes in portfolios and a higher appetite for riskier assets, which could in turn boost emerging assets that are better positioned to embrace it.

The Semiconductor Bottleneck

During the pandemic, semiconductors have become a central matter, especially in light of the increase in their demand. Semiconductors are employed in the production of a broad range of goods, from cellphones to vehicles. In order to understand their significance, it must be pointed out that a semiconductor is a type of material whose electrical conductivity can be modified, and is therefore adaptable to different electrical components. Due to their versatility, these materials are used in memory chips, microprocessors, and integrated circuits, all electronic components that are highly demanded worldwide.

The following chart shows the distribution of the top 10 companies in the semiconductor industry, with a projection of 2020 data:

Chart 1. Own elaboration. Data by


Three firms -Intel (USA), Samsung (South Korea), and TSMC (Taiwan) – hold approximately 60 percent of the total sales. Whereas Intel aims to cover its own needs, Samsung and TSMC focus on producing designs made by other companies, like Apple and Ford, which do not produce their chips. Here lies the production bottleneck, which is already provoking delays in sales. Such delays will lead to a decrease in the expected revenue and profits.

We must keep in mind that the technology sector is particularly exposed to this risk, and it was its stocks that brought the S&P500 index to last year’s records, so any impact on these companies would be felt on the overall perception of the stock market.


The Recovery of Commodities

Another element that can be linked to economic reactivation is the increase in the demand for commodities, which has shown significant growth this year. This impulse was mainly led by corn, but metals and crude oil display a double-digit growth rate in their prices. Undoubtedly, Chinese reactivation has greatly boosted demand, but the vaccination progress in the United States has become another key factor that strengthened this trend.

Chart 2. Own elaboration. Data by Bloomberg


An interesting fact: Hard Commodities -those that require an extraction process, like oil or metals- have shown a price increase, but the prices of corn, sugar, soybeans, and wheat have grown too. This exposes an increase in food needs, which goes hand in hand with the normalization of the international trade flows.

This growth scenario brings two consequences that must be considered: an increase in the foreign exchange flows towards the economies that produce these goods – which could balance the 2020 devaluations; and an increase in the prices, which may lead to higher inflationary levels for the buyers. I will talk about the second consequence in the next section.


Deficit and Prices

As the new year began and vaccination started, a scenery of economic growth came into view, but another consequence follows: an inflationary process linked to a higher demand for goods and services. The US Government, for example, published on May 12 its inflation data for April: a 4.2%, versus an expected 3.6%, reaching its highest levels since 2011. 

The point is that these figures also provoke a rise in inflation expectations, discouraging investors’ willingness to hold long-term bonds, as price trends influence the value of future flows. The public debt market is affected by the sale of long-term bonds, linked to another element that takes us back to 2020: the high levels of fiscal deficit. Governments were forced to drastically increase their spending to protect their economies from the financial consequences of the Covid-19 pandemic.

This increase in the fiscal deficit will push governments to introduce tax and fiscal reforms to achieve long-term sustainability. It is a very sensitive issue: in a context of high unemployment rates and economic contraction, these reforms could cause social unrest and political instability, as seen in Colombia. Therefore, investors will closely study government reforms to evaluate their impact on the expected growth path for 2021.

Other forces that affect the market may appear along the way, and those that were described in this article will display their characteristics, depending on the attributes of each market and country. Nevertheless, keeping an eye on them will be crucial to track their development and to evaluate the progress of 2021.

This report was made by Gandini Análisis for SupraBrokers only as content. It shall in no case be considered as an investment recommendation.

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