What can investors expect in 2021?

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What can investors expect in 2021?

We’re coming to the end of a turbulent year for investors, but experts say that the outlook in 2021 is refreshingly normal. Of course, the economic impact of COVID-19 and the associated social uncertainties won’t magically disappear as we cross into next year.

But from an investment perspective, there is a chance that a return to relatively normal circumstances could be on the cards.

Economic and investment predictions for 2021

According to Morgan Stanley Research, there is a high possibility that global economic recovery is sustainable. It’s likely that recovery will follow relatively normal post-recession formalities. Much of this is predicated on the sustainability of the V-shaped economic recovery that began in May 2020.

A strong GDP growth of 6.4% globally is predicted in 2021. This will be led primarily be emerging markets, closely followed by the reopening of the European and Us economies. In its research Morgan Stanley has taken a macro-economic approach, which deviates from other predictions.

And while it’s difficult to see any kind of return to normality, living as we are with rising cases and deaths around the world, the economy has proven fairly resilient. The steep drop in the global economy during the first quarter of 2020 was followed by the economic recovery. This remains on target to beat pre-pandemic GDP by the end of 2020, which logically points towards a stronger recovery next year.

Why investors should trust the process of economic recovery

While this projection differs from the consensus (a forecast of 5.4% global economic growth), consumers are driving the economic recovery. The growth of investment reflects the private sector’s tolerance and is a major factor in any economic recovery.

Three major factors will be part of the V-shaped economic recovery:

  1. Global growth, with economics recovering at the same time.
  2. A rebound of the emerging market
  3. The return of inflation.

Investors should, according to Morgan Stanley, trust this recovery.

Despite the unprecedented nature of the challenges faced by the global economy in 2020, this recovery pattern has been seen before. Following the 2008 economic crash, investor confidence was low. When the market began to rebound in 2010, we saw investors still questioning whether the recovery was likely to be sustainable. From today’s vantage point, we know that this was the start of a long period of economic stability and growth.

There is still uncertainty, and the markets are facing short-term uncertainty. These include how COVID-19 will continue to play out, when the global population will have access to vaccinations, fiscal stimulus, and the results of the US Senate runoffs in January 2021. Depending on the results of those, US intervention and ensuing economic recovery will be vastly different.

5 possibilities that could affect investors in 2021

  1. An upward surge in global earnings

The team forecasts an earnings per share growth of between 25% and 30% in 2021. The biggest potential for these levels of returns is within developed markets.

  1. Reasonable but uneven valuations

The market will begin 2021 while rallying, but strategically, global equity valuations are considered by be reasonable. And because geopolitical uncertainty and the virus are dampening investor sentiment, it’s logical to assume that the forecasted growth outlook isn’t priced within the equity markets.

  1. Investors should follow the ‘early-cycle’ playbook

If the forecasters are correct, and the economic cycle we’re living through is going to be relatively normally, investors should trust this recovery. This means buying stocks with lower expectations. Small businesses and firms usually lead when the economy begins to emerge from a recession. In addition, any future fiscal stimulus is likely to be directed at smaller businesses.

  1. Europe should rebound economically

Economic outlooks at the end of 2019 predicted that Europe was ready to rebound. And then, of course, COVID-19 immediately plunged most of the continent into lockdown. This means 2020 is likely to be the worst year for Europe for years. However, this could mean a strong bounce back next year.

  1. Be cautious with other asset classes

The early-cycle economic playbook for credit and equities should be relatively normal. However, the 2021 outlook for other assets is more complex. For example, in the early stages of economic recovery, commodity prices tend to rise. However, it’s more nuanced for assets such as oil.

Investors should stay alert and remain cautiously optimistic

The financial impact of the virus is not over, and investors must be cautious. But Morgan Stanley’s outlook offers a comprehensive view of a market that may well be stronger than once thought.

Investors should continue to adjust their portfolios, while considering the recovery value of their specific assets. And while the world has so far managed to keep a full global recession at bay, this shouldn’t lead to investor complacency.

It’s important to retain a sense of perspective and for investors to consider the following challenges:

  • The sharp rise in bankruptcies.
  • Job losses across all kinds of sectors.
  • Deferrals in credit card payments and commercial real estate.
  • Some developing countries are unable to keep up with debts.

While the likelihood of a sustained V-shaped economic recovery is predicted by some, others warn that investors are showing “insufficient concern”. My advice is to be cautiously optimistic and ensure your portfolio is diversified as far as possible.