As 2021 begins, the global vaccine rollout is under way, and markets have reacted positively to hopes of a light at the end of the tunnel growing nearer. That said, market risks related to the pandemic remain, as do potential risks related to geopolitical tensions. Global Market Strategist Esty Dwek shares her top 10 risks and top 10 questions to consider in the year ahead.10 Potential Market Risks for 2021
10 Questions for Investors to Consider
- Vaccine hiccups. Already, the vaccine rollout is slower than hoped. Logistics, availability, population willingness, side effects, mutations, all could lead to hiccups and delay broad inoculations and a possible return to normal, which is already priced in by markets.
- Growth disappoints. The virus could linger longer than anticipated, due to either poor vaccine uptake, problems with the rollout, or mutations. In this scenario, global growth may not rebound as lockdown measures continue to be extended.
- Inflation surprise. Activity may return to normal more quickly than expected, and with ongoing fiscal stimulus, inflation and inflation expectations could move higher, bringing into question Federal Reserve policy and zero interest rate policy, and potentially leading to a spike in yields.
- Taper tantrum. In a scenario where vaccine rollouts go smoothly and growth picks up, base effects could cause an uptick in inflation, which could result in the Federal Reserve talking about tapering sooner than expected. Bond markets might overreact, yields could spike and equities could suffer as they are counting on improvements in growth and earnings – but with ongoing low yields.
- US political turmoil. Infighting among moderate and progressive Democrats combined with concerns about President-Elect Biden’s tax agenda and other policies could lead to internal tensions and shake markets.
- US-China tensions. The trade war may improve under Biden, but tensions will remain and the tech wars are not over.
- Geopolitical tensions. Middle East tensions with Iran, tensions over Taiwan, upcoming elections in Europe could all grab headlines and lead to volatility.
- Tech selloff. In this scenario, tech leadership ends, the “bubble” bursts, or regulation impacts the tech sector, leading to a broader market selloff.
- Valuations/exuberance. With an already-constructive consensus and high valuations, markets could become overly optimistic and position too aggressively, leading to a sharp correction.
- Credit event. As a result of the 2020 Covid-19 crisis, a credit event occurs, spilling over into broader markets.
- Will vaccines work? Yes. While hiccups are to be expected, I believe that vaccine rollouts will generally be smooth and I am hopeful that enough of the at-risk population can be inoculated by the summer so that the world can start to get back to normal.
- Will the economic recovery reach escape velocity? Yes. After a long and painful winter, I expect growth to rebound sharply starting in the spring and to become self-sustaining.
- Will we see a tightening of fiscal or monetary policy? No. We are likely to see further fiscal support in the US and I believe that governments elsewhere will continue to lean expansionist. Similarly, central banks will remain ultra-accommodative, even if the Federal Reserve could start to reduce its QE program at some point.
- Will there be an inflation scare in the US? No. Despite the scale of fiscal and monetary support, fiscal measures have been income replacement, not enhancement, which is unlikely to lead to much inflation, especially with a slow-to-recover labor market. That said, with base effects, inflation could reach or pass 2% temporarily, but it will be viewed as “transitory” by the Fed.
- Will we see improved global trade relations? Yes. I expect President-Elect Biden to reduce trade tensions, particularly with American allies, though I do not believe all tensions will dissipate. In particular, I believe that US-China tensions, not just surrounding trade, will persist to some extent.
- Will equity markets continue to rally? Yes. Fundamentals remain strong, with improvements in growth and in earnings (thanks to vaccines), as well as massive fiscal and monetary support, which should all continue. That said, corrections are likely and we keep an eye on positioning as a constructive view has become consensus.
- Will the rotation towards cyclicals last? For now, yes. In the short term, the rotation can continue, but I believe that eventually, after some catch-up, investors will turn their focus back to earnings growth and earnings growth sustainability, which could see more defensive, growth sectors outperform again.
- Will sovereign yields rise sharply? No. I believe that better growth and reflation expectations will lead yields higher throughout the year, but that central bank actions will avoid a disorderly spike.
- Will the dollar keep weakening? Yes, for now. The reflation trade and improving risk appetite should continue to weigh on USD. However, at some point, I expect that weakness to be limited by better US growth, bigger fiscal impetus and higher carry.
- Will ESG (Environmental, Social and Governance) investing continue? Yes. The crisis has only increased appetite for ESG-related strategies, and governments around the world are focused on the topic as well. With broadly strong performance in 2020, demand is set to continue and even grow in the coming years.
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed are as of January 7, 2021 and may change based on market and other conditions.
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