Value context and insight. lkm@koreatimes.co.kr
2021: COVID-19 still pivotal to growth, policies and sector performance
JPMorgan Asset Management Asia Chief Market Strategist Tai Hui
By Lee Kyung-min
By Tai Hui
The year 2020 has been an exceptional one, largely due to the onset of the COVID-19 pandemic and the resulting global economic fallout.
Central banks and governments reacted quickly and aggressively, devising strategies as they learnt more about the virus.
These policies have helped markets recover from one of the sharpest bear markets in modern history. Still, they have also created challenges for investors going forward.
As we look forward to 2021, not only are we hoping for a better year with a gradual return to some normality, but we are also contemplating the investment advice that would be appropriate for such an unusual economic and policy environment. In the spirit of our weekly publication, “On the minds of investors,” we address nine questions that our clients are asking, or should be asking, regarding 2021.
What will economic recovery in 2021 look like? Is inflation a problem? Are we likely to see higher government bond yields? What are the risk factors that investors should monitor? Is the U.S. dollar on a depreciation path? What is the key message on asset allocation in 2021? Have equities already priced in all the good news? Can Asia continue to outperform? What strategy should investors adopt? How can investors find protection amid low developed market government bond yields? Why should investors invest in corporate credit and emerging market debt?
The COVID-19 pandemic will continue to dominate the economic landscape in 2021. And the speed with which governments can suppress it will, to a large extent, determine the economic winners and losers of the year ahead.
China's ability to contain the pandemic has enabled businesses and consumers to return gradually to normality. This is already reflected in its economic rebound since the second quarter of 2020. We expect China to continue to lead the global economic recovery in 2021.
For other East Asian economies, such as Hong Kong, Taiwan, Korea and Singapore, their competence in managing the pandemic will need to combine with a rebound in the global trade cycle to facilitate a stronger recovery.
In the U.S. and Europe, we believe that economic recovery could improve if their governments can strike a better balance between controlling the pandemic and maintaining economic momentum. These economies do have sufficient domestic demand to facilitate a rebound once policymakers find that balance.
Fiscal and monetary policies have been doing the heavy lifting in 2020 and should remain supportive. We shall discuss their outlook in subsequent questions. However, these policies have already done as much as they can in 2020, and we would expect a gradual pull back in fiscal stimulus as governments are burdened by growing debt.
They will need to be more selective and smarter on distributing fiscal resources. With policy rates already at zero, if not negative, developed market central banks are not in a position to make material cuts in policy rates. Even if they can step up asset purchases, the net impact on boosting growth could diminish.
Moreover, vaccine development and distribution, combined with accurate and efficient tests, should help to accelerate recovery.
However, this may not impact the real economy until the latter half of 2021 at the earliest, considering the amount of time that is needed to manufacture and distribute the vaccines. Additionally, not every economy will have the same access to vaccines in the early days.
This means the pace of global recovery is likely to be uneven.
The COVID-19 pandemic continues to be the biggest uncertainty facing investors in 2021. A resurgence of infections and prolonged disruption in economic activity could put companies, even those with the strongest balance sheets and fundamentals, under pressure. This could be partly offset by further monetary policy easing and fiscal programs.
The relationship between the U.S. and China should also stay on investors' radars. The new Biden administration may put trade tariffs on the back burner and be willing to work with Beijing on climate change and public health issues.
Still, it could continue to pressure China on intellectual property rights protection, geopolitics over the South China Sea and cross-strait relations with Taiwan. However, these potential points of friction should not have a major impact on global trade and economic growth.
A lack of fiscal discipline could become a greater concern as the global economy gradually recovers. While the markets are pragmatic about governments running massive deficits to support their economies from the fallout of COVID-19, investors may be less forgiving if any government uses this as an excuse to abandon fiscal discipline.
Governments' handling of the pandemic in 2020 also led to growing discontent among the public, forcing early elections or demands for regime change.
Recovery in 2021 should be supportive of risk assets, including equities, high yield corporate debt and emerging market fixed income.