This was an eventful and challenging year, especially for the global economy. As it comes to an end, a sense of optimism surrounds the markets, mainly driven by the progress made by laboratories like Pfizer and Moderna in the development of a vaccine against Covid-19. While all hopes are put on economic recovery, in Supra World we give you the key elements to know what to expect from markets in 2021.
THE VACCINE
As was mentioned above, vaccines are a central topic in everyone’s minds. What can be expected in 2021 will have to do with how laboratories and governments face the challenge implied by the reach and efficiency of vaccination. Vaccines from different manufacturers exhibit different characteristics, such as their storage temperature, the production costs and how the transportation must be made. What will happen depends on these particular features.
BIDEN’S VICTORY IN THE US
After President-elect Joe Biden’s victory last November, there are expectations of a shift in both internal and external policies in the US. Nevertheless, it must be noticed that these changes will not be immediate. Those reforms that require legislative adjustments will not be easily achieved with a divided Congress. The passing of economic assistance packages, for example, is slowing down, as debates between Democrats and Republicans intensify.
On the international arena, on the other hand, faster changes can be expected. Biden will probably work to reestablish and strengthen US relationship with its allies. The foreign policy will be closer to that of Obama’s administration, with coordinated actions on a global scale, as opposed to Trump’s unilateral decision-making. This implies variations on many fronts, such as the Paris Agreement on Climate Change. Led by John Kerry, the US may be seen again, not only as a participant on this subject, but also as a central player. China will probably have to deal with globally coordinated actions, instead of the ongoing tariff war.
Every OPEC+ meeting seems to carry its own problems, and so did the one held on December 3. This meeting was preceded by an internal division between Saudi Arabia and the United Arab Emirates: a relevant fact, given that both countries have always been close allies, and this division may affect the cohesion among the cartel of oil producers. The December 3 meeting conclusions were in line with market expectations. An increase of 500,000 barrels per day in production was decided for January, with monthly revisions by energy ministers for future decisions, showing OPEC+ concerns over the fragility of the oil market.
Another key element is the return of Libya to former production levels, following the civil war truce. This country is exempt from OPEC+ cuts and went from 450,000 barrels per day in October, to 1 million in November. In addition, Biden’s victory could revive the nuclear deal with Iran, one of the greatest diplomatic victories of the Obama administration, bringing another major producer back to international markets. It is estimated that both forces will increase the global supply of crude, which could bring the prices down.
Oil Market
Chart 1. Own elaboration. Data: Bloomberg
But while some of the market expectations are focused on production, it cannot be forgotten that they remain very tied to economic reactivation and the increase in the demand. This will depend on how vaccination unfolds, so a slow recovery is expected in 2021. The current price has already shown an increase due to this situation and trades at 48 dollars for the Brent benchmark, as is seen in Chart 1, thus placing analysts’ expectations published by Bloomberg around that value for the first half of 2021.
STOCKS
Stocks have been through a pretty eventful year, from the sharp falls in March at the start of the pandemic, affected by increased uncertainty, to record levels in their prices. This behavior can be seen in Chart 2, where the MSCI Emerging Markets index, composed of shares from emerging countries, and the MSCI World index, from developed countries, are compared. A relevant fact when reviewing these indexes is the weight that China has in the emerging countries index, which skews the behavior somewhat and shows the strength of the recovery of its shares.
Emerging Vs. Developed Markets
Chart 2. Own elaboration. Data: Bloomberg
As is seen, developed markets, and especially the US market, show accelerated growth -particularly of technology companies- while emerging markets seem to be a little late to the party. But as I have written in other articles, grouping all the emerging markets and expecting them to behave homogeneously is impossible, and the extension of that lag reflects that behavior, with Asians showing the fastest recovery due to their strong tech stock component.
There is another main element that has affected the behavior of stocks through 2020: the implementation of unprecedented expansionary monetary policies in most of the Central Banks of the world. This injected high levels of liquidity into the markets, causing the prices to rise.
By 2021, two forces will drive the behavior of stocks: on the one hand, a lower incidence of Central Banks after having spent much of their ammunition in 2020. On the other hand, an increased risk appetite in investors driven by the implementation of vaccines. It is possible to predict that the latter will lead to a scenario where the emerging markets are the ones to contribute the dynamism, with developed markets losing some momentum before the re-balancing of portfolios.
Undoubtedly, 2020 was a year of global changes, and its consequences will affect us for many years. So, what to expect from markets in 2021? It will be a year of great structural changes from the point of view of economic policies, seeking to recover the lost growth, but also from the perception of investors, as well as their expectations and visions on the markets. It is clear that after this juncture the way we see the world has changed, and this will be reflected in the upcoming year, which will bring its own challenges and consequences.
This report was made by Gandini Análisis for SupraBrokers only as content. It shall in no case be considered as an investment recommendation.
