2020 has been a challenging year and finally, we are approaching the end of it. Would the year 2021 see a strong global recovery? For global investors, which regional markets and asset classes to look to, and what risks to be prepared for?
23 December 2020
ATC Initiative interviewed Robert Parker, Chairman of the Asset Management and Investors Council, International Capital Market Association, who shared his views on these critical questions that guide investors’ investment decision making in the new year.
“We have seen clear evidence recently the interdependence between the European and Asian economies.
Other interviews in our ViewPoints Series
Q: The IMF is forecasting a strong global recovery in 2021: is this likely to be correct?
- The IMF has forecast the global economy will contract by over 4% in 2020 and will expend over 5% in 2021.
- The positive factors are the major expansion in the monetary and fiscal policy by all countries plus the roll-out of vaccines for coronavirus.
- Coronavirus is an unprecedented shock to the global demand and activities and this crisis is very different from previous ones.
- The IMF is correct to say we will have this major rebound in 2021. For a number of economies, we need to wait to 2022 until the size of the economy gets back to the same level prior to the hit of coronavirus.
Q: What regional differences will exist and will Asia be the growth driver in 2021?
- If we look back in 2020:
- Asia countries notably China contracted sharply in Q1 2020, and subsequently, China has started to recover from Q2 2020 as China has successfully curtailed the coronavirus than the other Asia economies.
- For Europe and the US, the major contraction was the Q2 2020 and rebound in Q3 2020 when the restrictions were eased. In Q4 2020, we are having the second wave, the growth is more muted while the growth of Asia led by China will be more sustainable.
- If we look at 2021:
- For China, the growth rate will probably excess 8% based on IMF data and our own work which is optimistic than the IMF figure.
- For the ASEAN five countries, the growth rate will be 6% and the growth rate of India could be back to 9%.
- For the US, the Federal Reserve is forecasting the growth rate will be 4.2% which I think is pessimistic because the monetary and fiscal policy expansion will spur the US economy and the high saving rate will accelerate the US consumer expending.
- For the Eurozone, the ECB is forecasting the growth rate to be 3.9% but the IMF forecast is 5.2%. The positive factors are:
- The expansion of the monetary policy and the increase of the size of the pandemic emergency purchase program;
- Another EUR 700 billion fiscal recovery plan;
- The high consumer savings;
- Dramatic increase in the vaccination program may be seen in Q1 2021.
- The acceleration of the Asia economy has supported the Eurozone economy due to the interdependence between the European and Asian economies.
- There is a consensus that the growth driver globally will be Asia with the assumption that successful curtailment of coronavirus in Asia ex India will continue. There has been a strong recovery in the economic data notably export data of Asia countries.
Q: Inflationary expectations have recently picked up: will inflation become a problem?
- I don’t think inflation will be a serious problem yet;
- For the US, current inflation is slightly under 2%. Based on the New York Federal Reserve model, the index of inflation expectation has picked up to close to 3%, but the projection of IMF and Federal Reserve will be close to 2.5% at the end of 2021 which is higher than the target of 2%.
- For Europe, we have deflation, the year on year CPI has been negative for the last four month. The average inflation may be slightly above 1% in 2021.
- For Japan, the inflation number recently is -0.9%.
- The rising of the price of oil and commodities will have an impact on headline inflation. In H1 2021, the headline inflation may rise but core inflation will stay low.
- I don’t think we need to worry about the surge of inflation yet until the world economy is operating at full capacity which may happen at the end of 2021 to 2022 but the potential of inflation increase should be a concern in early 2022.
Q: How will Central Banks change monetary policies and will Governments maintain easy fiscal policies?
- The balance sheet of the Federal Reserve is currently USD 7 trillion but it was USD 4 trillion at the beginning of 2020. We can see a similar expansion in the balance sheet of ECB. The balance sheet of the Bank of Japan is over 130% of the Japanese GDP. The total combined balance sheet size of the Fed, ECB BOJ, and People’s Bank of China is USD 27 trillion.
- The focus of monetary policy has been on quantitative easing and asset purchases but not on the interest rates which has led to very low bond yield and tight credit spread.
- The central banks have taken significant actions and now they are on hold. The focus has been switched to fiscal policy, for example, the EU recovery plan and the passage of the US further fiscal program.
- The budget deficit of the US government will probably be above 8% of GDP in 2021. The Japanese budget deficit will be over 10%. The Eurozone budget deficit will be 6-7%.
- It is not surprising if we see very little action on the monetary and fiscal policy in 2021, both governments and central banks will be watching very carefully whether the actions they have taken are effective.
Q: Should investors worry about the volume of debt issued in capital markets?
- Main countries are running debt to GDP well above 100%.
- But I think we don’t need to worry about this is because:
- In many countries, the bond yields are negative or close to zero. There is currently USD 18 trillion of investment-grade debt with a negative yield.
- The central bank is buying government bonds as a buyer of last resort which is a support of the government bond market.
- The government is issuing the debt with a very long maturity.
- Consumer and investor saving rates are very high.
- With the growth coming back strongly, the debt problem can be resolved over the next five to ten years.
Q: What are the major risk factors in 2021 and notably are markets divorced from economic reality?
- At first, the geopolitical risk factors are:
- The incoming Biden government has to deal with a problem with Iran;
- The relationship between the US and China;
- The relationship between the US and Russia;
- The Brexit issues in the UK;
- Some very important elections in Germany and France over the next one to two years;
- My own forecast on the geopolitical side is that the very difficult geopolitical tensions associated with the US Trump government will be easing because the US Biden government will re-engage with international institutions.
- The other risk factor is climate change. We have seen numerous examples of climate change distorting economies in 2020.
- Another risk is about monetary and fiscal policy. There is a risk to the global economy if the central banks or governments reverse their policy expansions too quickly or prematurely.
Q: What are the key opportunities for investors across all asset classes?
- Currently, the fixed income market is not attractive due to the negative real yield in most markets.
- For the commodity market, the big move in the price of commodities has already happened.
- For the foreign exchange market, emerging market foreign exchange is an attractive asset class. The trend of slow US dollars weakness continues and the currencies of some emerging market which have appreciated recently will continue their appreciation.
- For the equity market, I think the equity market will outperform other asset classes, and Asia and Europe will probably outperform the US, and the capital flow into the emerging market will continue.
- For the derivative market, fixed income proxy infrastructure is interesting and private equity is going to be generating returns in excess of those in the public listed equity market.
