2021 Outlook: Turning points on the road to recovery

We may one day look back at 2021 as a major turning point for the global economy, public health, politics and how we live and work in the digital age. Here are the key takeaways from Capital Group’s 2021 Outlook.

For illustrative purposes only.
1. GDP for 2021 is a projection.

 

The world is turning the corner towards recovery

The global economy is experiencing a serious case of whiplash. The pandemic-induced shutdown of 2020 — which caused the worst recession since the Great Depression — is expected to be followed by solid growth in 2021 across major economies, according to the International Monetary Fund (IMF).

sources: International Monetary Fund, World Economic Outlook, October 2020. GDP figures for 2020 and 2021 are projections.

 

The recovery in China, which has largely contained the pandemic and opened its economy, has been surprisingly swift. The world’s second-largest economy was expected to grow in both 2020 and 2021.

In the US, which enjoyed a record 33.1% annualised GDP growth in the third quarter of 2020, the IMF anticipates the economy will expand 3.1% in 2021. That follows an expected decline of 4.3% for 2020 overall.

“All economic growth forecasts depend on the trajectory of the vaccines,” says Capital Group US economist Jared Franz. Indeed, risks to a sustained recovery remain — chief among them a resurgence of COVID-19.

When will vaccines be widely available? “We’ve already seen some promising data from Pfizer, Moderna, AstraZeneca and other companies’ trials,” says equity portfolio manager Rich Wolf. “Granted, it will take time for a vaccine to be made widely available and to convince people to take it. That said, as of late November it appeared we would have two vaccines available under emergency use authorisation by the end of 2020. I expect there will be at least four vaccines widely available by mid-year 2021.”

 

Low rates, high markets: US Federal Reserve continues to support asset prices

sources: Federal Reserve. As of 30/11/20. In periods when the Federal Reserve had a target range, the lower bound has been used

 

As the coronavirus raced across the globe, the US stock market took a wild ride of its own, plummeting more than 33%,1 recovering to its previous high in record time and reaching new heights in September. Since then, with the US economy still digging out of recession, markets have remained elevated, if volatile.

Swift, aggressive action by the US Federal Reserve (Fed) to cut rates and establish lending programmes played a key role in the turnaround.

Central banks around the world also responded quickly. Learning lessons from the Global Financial Crisis, central banks in Europe and Asia announced accommodative monetary policy and extensive liquidity measures.

sources: RIMES, Standard & Poor’s. As of 30/11/20. Returns are in USD.

 

An ultra-low interest rate environment encourages investors to move into riskier assets, stocks in particular. “High-valuation growth stocks were market leaders both on the way down and on the way up — a historically unusual pattern,” says Capital Group portfolio manager Chris Buchbinder. “Looking further out, I expect a broader recovery across more sectors.”

How long will rates remain near zero? Fixed income portfolio manager Pramod Atluri says, ”The Fed has committed to maintaining near zero interest rates well into the recovery. I do not expect any rate hikes for the next two to three years.”

What's more, with the 2020 US election now in the rearview mirror, markets could get a further boost from government stimulus.

 

1.As measured by S&P 500 from 19/2/20 to 23/03/20. Source Bloomberg

 

Risk factors you should consider before investing: 

This material is not intended to provide investment advice or be considered a personal recommendation. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. Past results are not a guide to future results. If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease. Depending on the strategy, risks may be associated with investing in fixed income, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.