2021 Outlook: Evaluating an Unpredictable Year Ahead Sponsored
Provided by Eric Thompson, CEPA® , Senior Vice President - Wealth Management, Barnes, Thompson & Singor, UBS Financial Services Inc.
This year will never be forgotten, with its unprecedented shutdowns of economic activity, fusion of monetary and fiscal policy making, and a vote for new leadership in the US. The effects of the coronavirus were far-reaching and impacted people and businesses of all sizes across the globe. At the beginning of 2020, macroeconomic indicators seemed stable with positive business and consumer sentiment. But much has changed since then, and it goes without saying that the beginning of 2021 will look a lot different than the beginning of 2020.
A Brief Look Ahead to 2021
According to a research report published by UBS’s Chief Investment Office, titled “Year of Renewal”, it is anticipated that there will be a shift back to pre-pandemic norms and that the world will steadily return to normal next year, despite continued uncertainty, while rapidly accelerating into a transformed future. If investing in 2020 was about being resilient, large, and American, next year will be about going cyclical, small, and global as the sectors and markets most heavily affected by lockdowns start to revive.
The approval and rollout of a coronavirus vaccine by the second quarter, fiscal policy making, and US voters choosing legislative gridlock should enable corporate earnings in most regions to recover to pre-pandemic levels by the end of the year. As a result of this, UBS’s research outlines that more economically sensitive markets and sectors, many of which underperformed in 2020, will outperform in 2021.
Next year will bring a different mix of US political leadership, and new market leadership will follow. The report suggests that fiscal stimulus and more predictable foreign relations are expected to support cyclicals, companies that make or sell items and services that are in demand when the economy is doing well (restaurants, hotels, airlines, etc.). It is believed that this stimulus and foreign relations will help industrials (aerospace & defense, construction, etc.) and mid-cap stocks (companies with market value between $2 million and $10 million) perform well. Meanwhile, it is expected that higher deficits weaken the US dollar.
The coronavirus pandemic has accelerated, rather than halted, most of the long-term trends already underway. Because of this, UBS’s research also expects that a world that is more indebted, more unequal, and more local will result in below-average long-term returns across traditional asset classes. It is believed that investors have the opportunity to earn higher returns by positioning for a more digital future across 5G, fintech, and healthtech, and for a more sustainable one in greentech.
Insights on Key Areas of Concern in 2021
Many wonder when the world will recover from the impacts of this year. According to UBS’s research, it is expected that global economic output and corporate earnings will reach pre-pandemic levels by the end of 2021, enabling economically sensitive markets and sectors to outperform. 2020 is set to be among the worst years for the global economy in more than 70 years. As a result, it is thought that China will be the only large economy to record any growth, and estimated that the US economy will have decreased by an astounding four percent.
Economic policy is another topic many feel uneasy about. In 2021, UBS states that interest rates are expected to remain low and fiscal spending to stay high. This combination is believed to prove supportive of equities and credit, and contribute to a weaker US dollar. 2020 brought an unprecedented fusion of fiscal and monetary policy: To fund social support packages, governments ran an aggregate deficit of over 11 percent of global GDP in 2020, while the world’s top five central banks printed an aggregate of $5 trillion. In 2021, it is thought that governments in general will continue to “bridge the gap” until a vaccine enables a return to normal economic functioning and central banks to keep interest rates low to support growth and inflation.
What’s next for the US?
UBS expects the fiscal stimulus and the rollout of a vaccine will drive the economic recovery in the US. With a Democratic President and House along with a Republican-led Senate, political gridlock is likely. Divided government lowers the potential for significant policy changes, reducing the potential for policy-induced market volatility. UBS outlines three key effects of this political shift which investors should focus on:
1.Stimulus to boost consumer spending
It is thought that the new administration will be able to enact another coronavirus aid package worth between $500 billion and $1 trillion, or roughly 2.5%–5% of GDP, which should bode well for consumer spending and business confidence.
2. A higher deficit to weaken the US dollar
It is expected that a higher fiscal spending be funded by a rising deficit, rather than additional taxes. Although spending can largely be funded by private domestic savings in the near term, as the economy begins to recover in 2021, it is expected that the private sector increase spending, widening the current account deficit and requiring a weaker dollar to attract external funding.
3. A more predictable China rivalry to emerge
It is believed that the Biden administration will renew the US’s approach to foreign relations, a tack that could improve relations with Europe in particular. Although the fundamental US-China geostrategic rivalry won’t change, it is thought that the new administration will be less likely to use tariffs as a tool of foreign policy. Reduced trade tensions should support the economic recovery.
The world is a fast-changing one. No one could’ve predicted the impact of the coronavirus on the world this year. It is strongly urged that investors consult financial help as they navigate this ever evolving world and unpredictable 2021.
Eric Thompson is a Senior Vice President of Wealth Management at UBS Financial Services Inc in Norfolk. For questions related to exit planning, business ownership or any other wealth management topics, visit Barnes, Thompson & Singor website to find out more information. Eric can also be reached directly at [email protected].