Monthly Market Overview – February 2021

The upward momentum on vaccine optimism continued during the first weeks of January until a change in investor sentiment resulted in equity markets pausing for breath. Although manufacturing and trade are recovering, extended lockdowns in developed economies are likely to delay a rebound in services – particularly in Europe – and there is a growing acceptance that some restrictions may not be lifted until the second half of the year. Until vaccination programmes can be rolled out to a sizeable proportion of those most at risk, central banks and governments will be forced to continue policy support.

UK, Eurozone and US equities fell marginally in January while Japan, Asia and emerging markets produced small positive returns. The prospect of a cyclical economic upturn and higher prices – as a result of the pandemic disrupting supply chains – has increased inflation expectations. This was reflected in rising bond yields and negative fixed interest returns. While the dollar strengthened and gold slipped to $1,863/oz, oil has continued to recover from its low of $37 per barrel in late October and ended the month at $55 per barrel.

The global economy is expected to rebound this year from the deepest recession in living memory with GDP growth of 5% and 3.7% in 2022. After their rapid recovery in 2020, emerging markets should expand 6% versus 4% in developed economies. China has led the way and production continues to surprise on the upside. Despite consumer spending and infrastructure investment lagging, underlying growth remains strong and – with China apparently escaping further large scale COVID infections – this gives the authorities an opportunity to embark on a gradual normalisation of monetary policy. By contrast, growth expectations for Japan have been scaled back following the recent lockdown extension. Although less restrictive than previous measures, after the 5% decline in GDP last year, it is now anticipated to grow just 1.3% and 2.6% in 2022.

A significant element of market optimism is predicated on another year of supportive central bank policy and fiscal initiatives producing a strong cyclical upturn in the US and Eurozone. The new Biden administration has drawn up an ambitious and aspirational package including immediate COVID relief in the form of direct payments to individuals and “forgivable” loans to small businesses. If approved, the stimulus measures could boost GDP by around 7% and stabilise consumer spending over the coming months. When added to the estimated $1.5 trillion of household savings stockpiled during the pandemic, it should support a surge in demand for services as the vaccination programme allows an easing of restrictions on hospitality and travel. Housing has held up surprisingly well and business equipment investment is picking up. However, with barely half the 22 million jobs lost a year ago having been regained, the improvement in the employment numbers appears to have plateaued.

The resurgence of infections in the Eurozone means lockdown restrictions will continue for most of Q1 and are likely to result in a double-dip recession. As elsewhere, a great deal depends on securing vaccine supplies and rolling them out rapidly. Current expectations are for 3.7% GDP growth and 4.7% in 2022 but this assumes that 25% of the population – predominately those at higher risk – will have been vaccinated by the end of Q2, enabling restrictions to be lifted before the peak summer holiday period. Germany has weathered the latest lockdown relatively well thanks to a strong manufacturing rebound and a VAT cut to boost consumption. Italy is suffering badly and faces a long-term challenge to the sustainability of public debt. In Spain and Greece – where tourism is a major contributor to GDP – the timescale for recovery may need to be extended.

The UK has under-performed most developed economies during the pandemic largely reflecting the economy’s over-reliance on services and consumption. Although Q4 activity beat expectations – possibly as a result of Brexit stockpiling – GDP fell nearly 10% in 2020. Credit card and mobility data during the latest lockdown suggest a further contraction in Q1. Estimates for GDP growth this year of around 3% are based on a strong upturn and the unleashing of pent up consumer demand. This will depend on the UK maintaining its successful vaccination programme and a fall in hospital admissions allowing a gradual easing of restrictions during Q2. While the official unemployment rate is very low, labour markets and consumption are likely to be volatile as furlough and other support measures are unwound. Stockpiling has helped alleviate post-Brexit trade disruption, but higher frictional costs and less consumer choice appear inevitable.

With the year-end corporate results season underway, Q4 earnings should marginally surprise on the upside. However, as 2020 global earnings fell 10% – and significantly more in the UK – in absolute terms it is a year many companies would rather forget. Technology and healthcare were the only sectors to record meaningful gains although a broader range of companies in Asia also produced higher profits. The anticipated cyclical upturn means that energy, materials, consumer discretionary and financial sectors are seeing the sharpest upward revisions to earnings as well as the largest absolute gains. Above average dividend growth is likely in Europe albeit payments will not necessarily return to prepandemic levels. With sentiment indicators suggesting that a period of consolidation is overdue, further equity market gains may be modest until widespread COVID immunity is achieved and “normal” life can be resumed.