Outlook 2021: macro markets and geo-political landscapes
2021 is expected to be a year of resolution as the uncertainties of 2020 are resolved by the roll out of various vaccines and gradual gathering of herd immunity. But risks remain to the downside with a new strain of COVID delaying any return to a new normal plus the challenges of inoculating an entire population.
The tension between consumer caution and uncertainty on the one hand and pent-up demand on the other will play out as the pandemic takes its course.
Outlook 2021: geo-politics
Vaccine roll-out and the development of herd immunity hold the key to faster economic recovery. The new Biden administration sets a more co-operative, multi-lateral tone for the world giving a boost to the global ESG agenda. But while interest rates are expected to remain low, how long before talk turns to taxes being raised to rein in rising public sector debt?
COVID-19
- The second variant of COVID and its potential to swamp healthcare services before the full roll-out of the various vaccines bring further and more stringent lockdowns this side of Easter
- But Covid-19 uncertainties gradually resolve with vaccine roll-out
- Herd immunity likely in second half of 2021
- Questions remain around the emergence of further variants, the duration of immunity and onward transmission post-vaccination
- Rolling lockdowns and social distancing may continue beyond herd immunity
- Faster recoveries from pandemic expected in APAC
Globalisation 2.0
- President Biden brings change of tone and substance (see US below)
- Global trade/world-order returns to multi-lateralism; WTO revitalised
- US-China relations re-set
- Russia and Iran may remain outliers as sources of geo-political risk
UK/EU27
- Brexit uncertainties resolved with the ending of the UK Transition Period (TP)
- UK-EU FTA signed end 2020; starting 2021 under Provisional Application, pending full ratification. Residual risks of political disturbance
- Negotiations continue towards deeper trade engagement including beyond EU27
APAC
- Faster economic recovery expected versus western developed economies raising early challenges for new Biden administration
- First full year of new trading bloc - Regional Comprehensive Economic Partnership (RCEP)
- RCEP is first FTA to include China, Japan, South Korea; represents c30% global trade
- Continuing tensions around HK
US
- President Biden brings significant change of tone
- Changes in substance (domestic policy) follow more slowly - dependent on composition of US Congress following Georgia run-offs early January
Growth
- Global GDP recovery still expected (by the OECD) to be v-shaped ie to recover pre-pandemic GDP level by end 2021 subject to availability and success of mass vaccination programmes, the gradual reduction of the government support programmes and the government’s tackling of the record national debt
- Strong regional variations: UK/EU27 expected to be slower than APAC/USA
- All recoveries biased to second half of the year - arrival of herd immunity
UK
- FTA with EU27 is skinny but sufficient to mitigate worst fears for economic shock post transition period; removes considerable uncertainties over direction of travel; helps business confidence and investment to improve
- Investors are no longer having to arbitrage between two possible, opposing outcomes (Deal/No Deal) but are now trying to value the deal on its merits. So far they seem to value it closer to No Deal than to a full deal especially given the silence around Financial Services
- 60+ trade agreements already in place with other countries. Expect further progress on other trade deals
- UK GDP recovery from pandemic shock still expected to be slow compared to other major economies
- Slower growth and Brexit compromises may bring political challenges domestically
EU27
- FTA with the UK removes source of considerable uncertainty but economic impact less material than for the UK. Other political tensions, particularly with the Eastern member states continue to be an issue
- As with the UK, EU27 expected to be among slowest of major economies to recover pre-pandemic levels of GDP
- Slower growth and Brexit compromises may bring political challenges domestically
ESG
- US likely to rejoin Paris Climate Agreement
- UK hosts COP26 (Conference of the Parties)
- Renewed emphasis/priority on ESG generally – particularly the S and the G following Biden victory and global recognition of the need to improve pandemic resilience
Interest rates
- Managed rates (eg bank rate) stay close to zero
- Longer-dated yields (gilts/bonds) begin to rise with vaccine success. Anticipation of a return of growth/inflation
- UK/EU27 may remain more vulnerable to downside risk for interest rates given their more volatile pandemic response
Taxation
- Talk of paying down national debt grows louder as recovery gathers pace
- Attention turns to taxation
- Digital giants and other global players may find themselves back under scrutiny
COVID-19
- The second variant of COVID and its potential to swamp healthcare services before the full roll-out of the various vaccines bring further and more stringent lockdowns this side of Easter
- But Covid-19 uncertainties gradually resolve with vaccine roll-out
- Herd immunity likely in second half of 2021
- Questions remain around the emergence of further variants, the duration of immunity and onward transmission post-vaccination
- Rolling lockdowns and social distancing may continue beyond herd immunity
- Faster recoveries from pandemic expected in APAC
Globalisation 2.0
- President Biden brings change of tone and substance (see US below)
- Global trade/world-order returns to multi-lateralism; WTO revitalised
- US-China relations re-set
- Russia and Iran may remain outliers as sources of geo-political risk
UK/EU27
- Brexit uncertainties resolved with the ending of the UK Transition Period (TP)
- UK-EU FTA signed end 2020; starting 2021 under Provisional Application, pending full ratification. Residual risks of political disturbance
- Negotiations continue towards deeper trade engagement including beyond EU27
APAC
- Faster economic recovery expected versus western developed economies raising early challenges for new Biden administration
- First full year of new trading bloc - Regional Comprehensive Economic Partnership (RCEP)
- RCEP is first FTA to include China, Japan, South Korea; represents c30% global trade
- Continuing tensions around HK
US
- President Biden brings significant change of tone
- Changes in substance (domestic policy) follow more slowly - dependent on composition of US Congress following Georgia run-offs early January
Growth
- Global GDP recovery still expected (by the OECD) to be v-shaped ie to recover pre-pandemic GDP level by end 2021 subject to availability and success of mass vaccination programmes, the gradual reduction of the government support programmes and the government’s tackling of the record national debt
- Strong regional variations: UK/EU27 expected to be slower than APAC/USA
- All recoveries biased to second half of the year - arrival of herd immunity
UK
- FTA with EU27 is skinny but sufficient to mitigate worst fears for economic shock post transition period; removes considerable uncertainties over direction of travel; helps business confidence and investment to improve
- Investors are no longer having to arbitrage between two possible, opposing outcomes (Deal/No Deal) but are now trying to value the deal on its merits. So far they seem to value it closer to No Deal than to a full deal especially given the silence around Financial Services
- 60+ trade agreements already in place with other countries. Expect further progress on other trade deals
- UK GDP recovery from pandemic shock still expected to be slow compared to other major economies
- Slower growth and Brexit compromises may bring political challenges domestically
EU27
- FTA with the UK removes source of considerable uncertainty but economic impact less material than for the UK. Other political tensions, particularly with the Eastern member states continue to be an issue
- As with the UK, EU27 expected to be among slowest of major economies to recover pre-pandemic levels of GDP
- Slower growth and Brexit compromises may bring political challenges domestically
ESG
- US likely to rejoin Paris Climate Agreement
- UK hosts COP26 (Conference of the Parties)
- Renewed emphasis/priority on ESG generally – particularly the S and the G following Biden victory and global recognition of the need to improve pandemic resilience
Interest rates
- Managed rates (eg bank rate) stay close to zero
- Longer-dated yields (gilts/bonds) begin to rise with vaccine success. Anticipation of a return of growth/inflation
- UK/EU27 may remain more vulnerable to downside risk for interest rates given their more volatile pandemic response
Taxation
- Talk of paying down national debt grows louder as recovery gathers pace
- Attention turns to taxation
- Digital giants and other global players may find themselves back under scrutiny
Outlook 2021: markets
Public markets and corporate actions likely to respond to rising optimism by cutting demanded risk premia if herd immunity rises as expected. But secular changes are likely to develop further at a sector level, including oil, as the world adjusts to a post-COVID new normal.
Equities/corporate bonds
Volatility around modest uptrend as recovery gathers pace with intermittent periods of optimism and pessimism - driven by news-flow on vaccine(s) and the counter-balance of rolling lockdowns. Volatility may be lower in APAC given better pandemic response so far
Sectors
Secular changes continue in property, retail, leisure, transport and digital infrastructure as society adjusts to new normal (eg WFH)
Commodities
Oil price recovers with vaccine success but likely only to price levels first seen in the early noughties. Revitalised climate change action may bring further talk of peak oil (prices below peak) accelerating MENA response to become global centre of excellence for alternative energy/zero carbon economies
Corporate actions
M&A activity and investment flows expected to pick up further as economies recover with vaccine success. Defensive (survival) M&A may give way to more strategically opportunistic activity as companies position for the new normal - including growth in ESG funds and associated values
Equities/corporate bonds
Volatility around modest uptrend as recovery gathers pace with intermittent periods of optimism and pessimism - driven by news-flow on vaccine(s) and the counter-balance of rolling lockdowns. Volatility may be lower in APAC given better pandemic response so far
Sectors
Secular changes continue in property, retail, leisure, transport and digital infrastructure as society adjusts to new normal (eg WFH)
Commodities
Oil price recovers with vaccine success but likely only to price levels first seen in the early noughties. Revitalised climate change action may bring further talk of peak oil (prices below peak) accelerating MENA response to become global centre of excellence for alternative energy/zero carbon economies
Corporate actions
M&A activity and investment flows expected to pick up further as economies recover with vaccine success. Defensive (survival) M&A may give way to more strategically opportunistic activity as companies position for the new normal - including growth in ESG funds and associated values
Outlook 2021: regulations
The global financial crisis brought a raft of new regulation to deal with its causes and the vulnerabilities it exposed. The COVID-19 pandemic may have a similar result aiming to help the world improve its pandemic resilience. Our recent ESG survey suggests that companies respond best to some combination of altruism and regulation.
Improving pandemic resilience
- The world cannot afford another COVID-19 on this scale
- Means consolidating progress made in agile vaccine development – but raises questions around IP/common good
- Also means addressing vulnerabilities exposed by the pandemic – inequalities by gender, ethnicity and income
Will new regulation be brought to help answer those questions in the same way as it did for consumer protection or bank regulation post global financial crisis? Or will recovery bring complacency instead? Boardroom culture holds the key