Markets bet on recovery in 2021

Last Tuesday, I took a call from my good friend, Ronnie, whose equity portfolio I manage.

It was the first day of December, and the media was describing November 2020 as a record month for global stock markets. The S&P500, a measure of United States (US) equity markets, had climbed a staggering 11%, supported by news that an effective COVID-19 vaccine would be available before the end of the year, that a Joe Biden presidency would repair America’s battered international image, and that the leading nations would continue to sustain an ailing world economy.

“Did you catch the bounce?” was Ronnie’s only concern. “Were we fully invested, huh?”

Ronnie had worked hard his whole life and was very well-off. But he was a born worrier. He would openly confess that if he had nothing to worry about, he couldn’t sleep at night.

I shook my head, bemused, and laughed out aloud. “Ronnie, back in March [when the stock market plunged dramatically], you phoned me in a total panic, insisting I build a cash buffer against further losses. Get out, if you must, you urged me. Now you are asking me if I ignored your hysteria, stayed fully invested, and rode the recovery?”

Ronnie’s mania bears testimony to the extraordinary emotional buffeting we weathered over the past eight months. When news of the deadly virus first broke, we were consumed by fear and uncertainty, troubled not only about our health but also about our financial well-being. We were shaken to the core.

Yet, as the medical profession developed a better understanding of the virus and modified its treatments accordingly, and as the scientists made progress in creating vaccines, society gradually regained its confidence and adapted its lifestyle to new conventions, sanitising hands and wearing masks in public places and contacting friends and families on video rather than in person. People have slowly returned to shops and restaurants, keeping their social distance and not lingering unnecessarily.

The advances mitigating the virus and the wide distribution of vaccines projected in 2021 are guaranteed to make next year more prosperous than 2020. The global economy will recover from the steep decline suffered in the first half of 2020, when governments around the world imposed far-reaching lockdown measures, bringing international trade and industry to a near standstill. The extent of the recovery we expect is difficult to calibrate, particularly against the recurring outbreaks of the virus in the US, United Kingdom, and Europe, although the consensus among leading investment houses suggests that global economic output and corporate earnings will reach pre-pandemic levels by the end of 2021.

These forecasts take for granted ongoing fiscal and monetary measures from governments and central banks designed to bridge the loss in income and revenue inflicted on households and businesses by the closure of the world economy in 2020. And until the world’s largest economies have fully recovered from the financial and psychological devastation caused by the virus, additional stimulus packages will follow. A precondition of these remedial actions is that interest rates will remain low for a very long time. With interest rates at rock bottom, equities will continue to outperform other asset classes like credit, bonds, and property. This isn’t good news for investors seeking yield who might have to modify their income targets, substituting capital gains for interest

We should also not underestimate the role of the outcome of the American election on a rebound in the world economy. A Biden victory has raised hopes that, in the absence of troublesome Trump tweets, trade and commerce between the US and its allies will thrive. Popular appointments to Biden’s cabinet, too, have added to the positive sentiment surrounding his victory.

There are many companies whose services helped us cope with the challenging times experienced over the past eight months, businesses such as Zoom, Amazon, Netflix, Google, Facebook, and Uber Eats, and the question is whether these firms will continue to prosper when life returns to normal after the pandemic is beaten. In addition, investors ask, will those businesses that were wrecked by the lockdown – hotels, restaurants, theatres, shopping malls – recover speedily, or will the change in attitudes and habits encountered during lockdown leave a permanent incision on our lives?

Patterns about the future shape of our lives are clearly emerging, from families requiring more space for stay-at-home work to increased outlays on upgrading residences and purchasing more powerful computers. Moving to the suburbs has driven a demand for privately owned motor vehicles, while seeking the companionship and joy of four-legged friends has led to a boom in pet food. Home fitness programmes are flourishing, athleisure has replaced formal office wear, and exposing your face on Zoom has sustained the demand for face cream and makeup.

Other developments and changes we have embraced, such as signing documents digitally, ordering home delivery from restaurants and shopping online, will stay with us well after the pandemic is over.

The rise in share prices that has pushed global equity indices to record peaks during 2020 have been the “virus winners” – the big technology giants that helped us keep our sanity during lockdown. Their dominance in the markets in which they operate and their policy of using their vast profits to seek new avenues of growth will underpin further gains in 2021 and beyond. But as infection rates in the world diminish and the global economy renews itself, “vaccine beneficiaries” – hospitality, leisure, financials, energy, and metals – will broaden the market’s opportunities and appeal. Whatever, we are safely positioned for another good year in stock markets.

I ended my call with Ronnie, assuring him affably that during our long and established relationship, we had learnt to navigate his impulsive outbursts. As I explained at the time, the one thing I had learnt over many years on the stock exchange was that after every major disturbance, no matter how severe, the stock market soon recovered – some a little sooner than others. It happened after 1969, 1987, 2000, and 2009 – and 2020 didn’t disappoint!

• David Shapiro is a veteran stockbroker, market commentator, and former deputy chairman at Sasfin Securities.