Namrita Maan provides an overview of financial markets in 2020 and discusses the outlook for 2021.
It’s fair to say that in 2020, COVID-19 altered our lives in unprecedented ways. The locking-down of major economies and borders in March 2020 triggered the deepest recession since World War 2, forcing governments, central banks and market commentators to lower growth expectations.
While global share markets experienced phenomenal decline, they quickly recovered – with most ending 2020 at or close to record highs. This has been sustained by supportive monetary policy, historically low interest rates, positive vaccine news, and the US election outcome. Share markets are expected to continue their upward trend in 2021, albeit with some volatility.
Election outcomes and policy agendas
Global investment markets rallied in November and December, ahead of Joe Biden’s 2020 US election win. The official declaration however, wasn’t made by Congress until January. Within 24 hours of taking office, President Biden revised and enacted 15 executive orders – with further policy changes expected.
First up was a $1.9 trillion coronavirus relief package. Other priorities predicted to shape the US economy and influence global financial markets during Biden’s first term include re-joining the Paris climate agreement, fighting social inequalities, revising immigration policies, amending tax regulations, and implementing multilateral foreign policies. Financial markets have reacted positively, and anticipate a more diplomatic dynamic in the oval office.
Back home, markets were comparatively muted following Jacinda Ardern’s landslide victory. Her Government’s agenda is similar to Biden’s, with a focus on climate change, social inequality, and income tax. Our overheated housing market continues to pose the primary challenge, with economists expecting a 15 percent rise in 2021, and a capital gains tax being ruled out. A return of tougher Loan-to-Value (LVR) restrictions by the Reserve Bank of New Zealand (RBNZ) are also due to take effect from 1 May.
The recent recurrence of cases in the community has seen a fresh level 3 lockdown being imposed in Auckland and level 2 restrictions for the rest of New Zealand for a period of three days. While this is expected to have a limited impact, economic activity may suffer if there is a full-blown community outbreak and the restrictions extend beyond a few days.
The biggest immunisation campaign in history is currently underway following successful trials in November and December 2020. More than 70 million doses have been administered in 57 countries, with pharmaceutical giants Pfizer-BioNTech and Moderna leading the campaign. Most countries are expected to begin administering vaccines in the first half of 2021. Having recently been given the tick of approval by Medsafe, the New Zealand Government has confirmed it has received the first batch of Pfizer vaccines and will be vacinnating border staff as their first priority.
Successful immunisation campaigns are expected to spark a markets rally in 2021 – and reopening of borders will be positive. Cyclical companies (those that do well when the whole economy is expanding) – such as those in the industrials, automotive, energy and tourism sectors – are expected to be the main beneficiaries. The road to recovery however is not expected to be smooth; emerging markets may lag behind developed markets as economies open, due to delays or limited supply of COVID-19 vaccines.
Interest rate expectations
The world’s central banks look set to keep interest rates as low as possible in order to help stimulate global growth. In the US, interest rates are not expected to rise until 2023, while in New Zealand, the RBNZ maintains the Official Cash Rate (OCR) at a historical low of 0.25%.
With both interest rates and inflation remaining low, this should be supportive of sharemarkets. Meanwhile, low bond yields are creating a more challenging environment for bond investors. It is also particularly hard for investors in cash, given the very low rates of interest available from both term and on-call investments.
Overall, investors appear to be cautiously optimistic about the global recovery. This should be supportive of sharemarkets over bond markets, cyclical stocks over technology stocks, credit sectors over investment grade and government bonds, and emerging markets over developed economies. However, some risks remain, including the possibility of discovering new coronavirus variants which the current vaccines are less effective against and ever-increasing levels of government debt.
The information in this article is provided for general purposes only, and is a summary based on selective information which may not be complete for your purpose. To the extent that any information or recommendations in this article constitute financial advice, they do not take into account your financial situation or goals and is not intended as personalised financial advice. While BNZ has made every effort to ensure that the information provided is accurate, you should not rely on this information to make any financial decision without first having sought advice specific to your circumstances from an authorised financial adviser. Neither BNZ nor any person involved in this article accepts any liability for any loss or damage whatsoever which may directly or indirectly result from this article.