Reopening and catch-up trade are already in full swing... this move will continue into 2021, but it could run out of steam as the move ‘back to normal’ gets priced in.
Here Esty Dwek offers her thoughts on the key factors driving the investment environment in 2021.
Encouraging vaccine news is leading to optimism about a possible return to ‘normal’ at some point in 2021. As a result, reopening or catch-up trade is already in full swing, with moves from defensives to cyclicals and diversification from the US towards Europe and – especially – emerging Asia.
In our view, this move will continue into 2021, particularly as the next fiscal stimulus should arrive. However, it might eventually run out of steam as the return ‘back to normal’ gets priced in and investors return their focus to earnings and growth.
Moreover, this view is very consensus and positioning has become bullish and cyclical, suggesting a higher risk of reversals. Overall, though, we remain constructive on risk assets and believe this rotation will continue for some time.
We do not believe inflation will be a concern in 2021.
Monetary policy has been ultra-accommodative for years, and while in 2020 the supply of money rose fast, the velocity of money did not. This indicates various QE programmes will not lead to inflation.
Any fiscal stimulus package delivered by a split Congress will also not be substantial enough to generate inflation. So far, fiscal measures have helped ‘plug the hole’ – they have been about income replacement, not additional income. Given ongoing containment measures, we do not expect this to change next year.
That said, given base effects, inflation in the US could rise above 2% at some point in 2021. If it does, it should not lead to any action by the Fed, as it will be likely be perceived – with justification – as transitory.