Market Review - January 2021

February 4, 2021

By Jan Faure

Uncertainty rattles markets as investors face a make or break year.

The new year got off to mixed start with emerging markets making gains while developed market equities closed out the month weaker. Markets had rallied strongly in the final two months of last year following a trade-friendly US election result and positive vaccine news. Investor optimism hinges on a successful and rapid vaccine rollout and sustained support for fragile economies. Markets had made a positive start in January but faded as concerns grew over equity valuations and a spike in coronavirus cases (and new variants).

Despite a weak end to January, there is still optimism in markets that vaccines will work and, as such, has allowed markets to price in the other side of the pandemic. There also remains a highly accommodative backdrop of unprecedented monetary and fiscal stimulus.

Newly elected US president Joe Biden announced a fresh $1.9 trillion spending plan, including additional payments to households, an expansion of jobless benefits and an enlargement of vaccinations and virus-testing programs. If passed, this latest stimulus effort takes total US fiscal support to $4.8 trillion.

Despite a marked increase in unemployment, the US consumer has been kept in a reasonably healthy position. The US consumer (in the form of consumption expenditure) makes up about 70% of US GDP. This is why America’s stimulus has been so aggressive and specifically targeted at their citizens’ pockets.

As the chart above illustrates, Americans added $1.6 trillion in savings during 2020, far exceeding the average annual growth in savings of approximately $450b the previous four years. In essence, there is a $1.1 trillion spending reserve in the US waiting to be unleashed when consumer confidence returns, and could provide a much-needed boost to US GDP growth.

One of the major risks of the massive stimulus that we’ve seen worldwide is a rise in inflation. Inflation would likely force central banks to respond with higher interest rates in order to contain inflation (as this is their primary function). If this happens too soon it could derail the economic recovery and even lead to a recession.

The US 10-year treasury bond chart above illustrates just how low interest rates are in the developed world (developed Europe and Asia are similar). Generally speaking, there is an inverse relationship between equity valuations and interest rates due to the discounted cash flow method applied to valuing companies – the lower the discount rate (interest rate) the higher the company valuation (and vice versa). As such, any unforeseen or uncontained rise in inflation could put equity markets under pressure.

Turning to 2021 and our expectations. There are currently 3 macro themes that will likely impact investor returns for 2021:

- Covid progression andvaccine response
- Continued monetary and fiscalstimulus
- US trade policy under theBiden administration, especially US-China relations

For stock market investors, we should see a continued recovery in risk appetite as the vaccine rollout brings the pandemic under control. This could lead to a repositioning in equity markets from last years’ “Covid-winners” within the technology sector towards the beaten down cyclical sectors (the value end of the market).

Loose monetary policy, along with fiscal support, should further support risk appetite and equity markets in 2021. Lastly, the Biden administration has brought calm to chaotic foreign policy under the

Trump government. The US presidential election, together with the Democratic party’s control of the House and Senate, has provided a measure of stability to the global geopolitical outlook. This bodes well for soothing of tensions between the world’s two most important economies - the US and China. Biden’s Democrat government will handle complex global issues in a more predictable (important for market stability) and diplomatic manner than the previous Trump administration. Greater certainty should also provide investors with more comfort to deploy capital into riskier assets.

GLOBAL INDICATORS: Local reporting currencies

Source:Bloomberg,, S&P Dow Jones Indices
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