Macro Outlook for 2021

A multi-speed recovery, dependent on vaccines and spending

With the pandemic continuing to impact global economies, we expect a K-shaped recovery (Figure M1), differentiating industries and regions that have emerged quicker and in better shape from the recession. This favours countries such as China, Taiwan and South Korea, and sectors like E-commerce, Electronics, Software and Pharmaceuticals. These ‘winners’ will outperform regions that were worse hit by COVID-19, such as India and Latin America, as well as sectors related to Travel, Tourism and Hospitality.

As we approach the middle of 2021, COVID-19 cases are expected to fall as widespread vaccination takes place across the world. Governments can then gradually reduce business and personal restrictions, allowing for economic recovery to accelerate in the latter part of 2021. This will give a boost to all segments of the economy, including the pandemic-afflicted sectors.

In the meantime, governments will continue to provide much-needed economic support. Fiscal spending in the US, for example, is expected to increase under a Biden presidency through infrastructure funding, though a Republican Senate will likely block more aggressive spending plans. The US will likely continue to pressure China strategically to curb its growth, especially in technology, where China is expected to expand its own capabilities. This ongoing technology race between the rival economic superpowers will create investment opportunities to tap on.

In continental Europe, the European Central Bank (ECB) will continue injecting money into the economy, while government spending plans will tap on the EUR 750 billion Next-Generation EU (NGEU) Fund. The fund is expected to prioritise green projects, which will be a boon for the environment. In the UK, post-Brexit trade restrictions will leave the UK government with little choice but to spend in order to help buoy the domestic economy.

The fiscal outlook for Emerging Markets is mixed. With limited coffers, Latin American governments will face greater spending constraints in supporting the economy. Conversely, most Asian economies are better equipped to provide ongoing economic support due to their earlier recoveries and generally more responsible fiscal discipline.

Muted inflation and accommodative central banks

With so much government spending anticipated, central banks will generally want to keep monetary policy loose for fear of stunting the recovery. The gradual recovery of demand should keep inflation positive but muted, thus avoiding a deflationary environment.

Against this backdrop, global central banks will more likely take the lead from the US Federal Reserve to accommodate above-average inflation – for example, above 2.0% – for the next three years or so, before considering hiking rates.

Cautious optimism for corporate earnings growth

With a low interest-rate and higher-growth environment, corporate earnings are expected to rebound from 2020 levels. The Industrial and Materials sectors will benefit from a Biden infrastructure plan, although the Senate may resist a large package. High-growth companies such as those in the Technology space will likely continue their outperformance, although increasing scrutiny from US regulators might hamper their growth potential.

The Healthcare sector faces the risk of similar regulatory and profitability pressures with any expansion of the Affordable Care Act (aka Obamacare) due to greater oversight and price restrictions set by the US government, but healthcare technology developments will increase the overall sector’s growth potential.

Potential tax increases in the US would dent net profitability for many corporates, but improving economic data and increased government spending should cushion any negative impact.

A relatively bright outlook awaits the Travel and related industries, but only when widespread vaccination is available and takes place. Companies that depend on consumer discretionary spending will likely see healthy earnings growth as employment and wages improve.

Renewed optimism to spur consumer spending

With hiring expected to pick up as the economy recovers, families will benefit from higher levels of disposable household income. Pent-up demand suggests that discretionary spending in areas such as travel and leisure, dining out and luxury goods, will likely improve amid easing COVID-19 measures and the economic recovery gathering momentum. Spending on consumer staples like groceries and daily necessities are likely to remain constant, therefore limiting any upside for this sector.