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From hope to optimism
08 Mar 2021

It was around 12 months ago when concerns over the spread of coronavirus and its potential impact on global growth dominated financial markets. Equity markets fell sharply, and bond yields were broadly lower amid concerns that the impact of coronavirus could send the fragile eurozone economy into recession.


New infection rates rose significantly across the globe, especially in Europe and the US, topping the previous highs and forcing governments to implement new stringent lockdown measures to slow the spread of the virus.


With 2020 behind us, investors are facing 2021 featuring many of the same concerns with surging COVID-19 infections and fatalities, large numbers of unemployed, lingering concerns about the pace of the economic recovery, political gridlock and a relatively slow vaccine rollout.


As seen over last year, the manufacturing sector continues to show more resilience to the pandemic than the services sector, a trend observed globally. Recovering demand for goods and lower sensitivity to social distancing helped to keep manufacturing Purchasing Managers’ Indices (PMIs) in expansionary territory. Yet, the reopening of economies and the availability of vaccines will gradually unleash a new wave of spending on travel and services.


The hope to an end to this healthcare crisis circled around the creation and distribution of a potential vaccine. With the development of a vaccine now a reality, the end to the COVID-19 crisis now appears to be in sight, but the path to recovery may still be bumpy over the coming quarters. After various vaccines gained approval by the relevant authorities, the rapidity of manufacturing and distribution logistics will be key to return back to normality as early as possible.


The elongated crisis called for the intervention of governments and central banks to ease policy rates expected to be kept at effective lower bound and raise fiscal spending until it felt confident again that economic activity is back on track towards full employment and the inflation target.


On the monetary policy front, consequently, the European Central Bank (ECB) expanded its unprecedented Quantitative Easing Programme by increasing the size of its planned asset purchases by another €500 billion to €1,850 billion. It also extended the horizon of the programme by nine months until the end of March 2022. This has kept major bond yields at record lows going into the year, despite the expected large amount of gross government bond supply to support their respective pandemic relief programmes.


The key takeaway for bond investors is that, despite market hopes of an economic recovery, government bond yields moved only modestly higher due to the unwavered support by the major central banks. Rates and yields are likely to remain low for even longer.


In the US, yields are expected to remain lower for longer due to loose monetary and fiscal policies and although US corporates look expensive at such levels, the commitment by the FED to extend its measures should support the present spreads over H1 2021.


The manufacturing sector continues to show more resilience to the pandemic than the services sector

On the fiscal front, one of the few positives of the pandemic was the speed at which the usually bureaucratic European Union acted. Its main achievements were the EU Recovery Programme and the European Green Deal. These should pave the way for a €1.8 trillion financial support package. It was agreed that a significant proportion of the budget and recovery fund has to be spent on sustainable and green projects.


The EU also agreed tougher climate goals for 2030; by increasing the reduction in carbon emissions, it is targeting vs. 1990 levels from 40 per cent to 55 per cent by 2030. This will lead to significantly higher investments in renewable energy and more regulation.


Moreover, Joe Biden’s victory in the US presidential election further enhanced green energy demand. During his election campaign, Biden promised to put climate change in the centre of his policies.


The vaccine rollout in the first half of the year should therefore lead to the expected recovery in the second half of 2021. This brings along the risk of a return of inflation. As the end to this pandemic hopefully approaches, some prices that had been depressed are expected to start to reassert themselves. Rentals, air fares and hotel rates are but a few examples. It’s therefore the time where cyclical industries merit more attention.


With investors betting on an economic expansion, the 2021 stock market forecast includes an expected shift in market leadership from last year’s losers. Cyclical and value stocks are widely forecast to outperform as the economy thaws out from coronavirus restrictions.


Sectors that are expected to rise with an ebb in coronavirus cases include consumer discretionary, particularly travel, restaurants and retail, energy and financials. Consumer behaviour has shifted online during the onset of the pandemic. This behaviour is expected to have permanent consequences as major retailers are focusing on building an efficient online infrastructure to meet the demand of their respective customers.


The detrimental impact of the pandemic has also hit our shores, yet Malta is still expected to overperform its peers, with the ECB’s forecast for the island of three per cent in 2021. In the meantime, as the return to normal life is very much visible on the horizon, we continue to remain cautious on downside risks such as continued uncertainty about what comes after phase one of the US-China trade deal, antitrust, privacy and tech regulations, and default rate spikes to mention but a few.


The stock market, which is based on expectations and is forward looking, has shifted the 2020 hopes to optimism as it seems to have already factored in a stronger economic recovery and the arrest of the coronavirus pandemic. This will bring opportunities within quality companies within selective industries that can dominate throughout the year.


The writer and the company make no guarantees, representations or warranties and accept no responsibility or liability as to the accuracy or completeness of the information contained in this article. They have no obligation to update, modify or amend the article or to otherwise notify a reader thereof in the event that any matter stated therein, or any opinion, projection, forecast or estimate set for the herein changes or subsequently becomes inaccurate.


Loredana Vella, Investments analyst, BOV Asset Management

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