COVID-19 and investing - the outlook for 2021

How COVID-19 is impacting global investments

In 2020, COVID-19 had an extreme impact on the global economy and financial markets. Even with the successful development of vaccines, we believe the coronavirus will continue to dominate developments in 2021.

It feels as though the world is currently on the cusp between the devastation wrought by the virus and the potential re-emergence of economic health. However, that doesn't mean that everything before this was disastrous, or that everything coming next will be positive. It is easy both to underestimate the significant progress which has already been made in the war against COVID-19, and to dismiss the many battles yet to come.

Achievements that are changing the world – and the financial markets

It is extraordinary that scientists have achieved so much, so quickly, in the search for a vaccine. Now that Moderna, Pfizer/BioNTech and Oxford/AstraZeneca have developed immunisation treatments which have been shown to offer incredible effectiveness, what can we reasonably expect in 2021?

In this article, we look at the coming year from both an economic perspective and also the impact on financial markets. We explain why the rotation from growth to value stocks will persist, why Asia and China will lead the way economically and why the US dollar’s role as a safe haven will prove to be a headwind in 2021 – and consider the implications for investors. You can read the article in full below or watch the video:

The search for a vaccine

At first, hopes for near-term medical relief were low. Despite years of trying, no coronavirus inoculation had ever been successfully developed, while condensing a typical 10-year drug development cycle into just 12-18 months was unprecedented.

The development of COVID-19 vaccines has been massively accelerated

Even as late as September 2020, an article published on Bloomberg highlighted the challenges that remained:

“To deploy a vaccine widely by early next year, many things must go right. One of the vaccines has to work. The vaccine that works has to be one of the handful that are already in late-stage trials. There can’t be a major safety concern or delay. Clinical trials have to generate strong evidence. The FDA [the United States Food and Drug Administration] has to accept that evidence and review it rapidly. Manufacturing must go near perfectly. Hundreds of millions of doses must be delivered around the country, likely with some degree of low-temperature storage requirements."

However, rapid progress prompted optimism that a breakthrough might be seen before the year was out, aided by programmes such as the United States’ 'Operation Warp Speed' and its US$10bn budget. 

As various treatments reached the critical phase III stage, the odds of a successful outcome improved dramatically. While most drug and vaccine candidates fail, the ultimate success rate varies depending on the therapeutic area. Overall, oncology drugs have just a 3.4% historical chance of reaching approval. However, 85.4% of vaccines against infectious diseases are successful once they reach the large-scale efficacy and safety landmark which forms part of the phase III trials.

What will happen next in the world’s different economies?

It is tempting to assume there must be some form of mean reversion in 2021; those economies which fared the worst in 2020 will bounce back most strongly, while those which displayed resilience could be relative laggards moving forward. This may be too simplistic an assumption.

When bringing together factors such as access to COVID-19 vaccines, lockdown severity, 2020 growth forecasts, universal healthcare coverage and coronavirus cases and fatalities, it is possible to construct standings such as Bloomberg’s COVID Resilience Rankings. Including 53 economies valued at over US$200bn, this shows that nine of the top 12 nations are from Asia and Australasia. The US ranks 18th, the UK 28th, while the bottom three spots are filled by the Latin American countries of Peru, Argentina and Mexico.

While the UK and US should have managed the pandemic better, both nations will be at the forefront of the vaccination wave and could see large swathes of their populations inoculated earlier than other nations. Together with Canada and China, each country has five supply agreements with vaccine makers who have undertaken phase III trials, followed by India, Japan and Indonesia with four.

Which factors could create head and tail winds in individual economies?

Two key considerations that will affect individual economies are 1) speed of access to the vaccine, and 2) the willingness of a country’s population to be vaccinated. 

1) Speed of access

The speed of access to the vaccine around the world will vary widely, with many developed nations benefiting from supply deals with vaccine-producing drug companies. For example, while France may be negatively impacted by a widespread unwillingness to accept a COVID-19 vaccination (see next paragraph), it will benefit from relatively early and widespread vaccine access.

2) Willingness to be vaccinated

There is a significant divergence in enthusiasm for a vaccine across the world. Only 54% of French survey respondents reported that they will accept a vaccine when available, while the US also rates poorly by this metric (64%). At the other end of the spectrum, 87% of Indian and 85% of Chinese respondents revealed that they will take it, while the UK stands somewhere near the middle of the pack (79%).

There are many reasons cited for vaccine reticence, including concerns about side effects, wariness that the clinical trials have been rushed, general vaccine opposition and a feeling that the chances of contracting COVID-19 are low.

The Bloomberg article quoted above went on to explain:

"Getting Americans to take it may also be a challenge. For the 2017-2018 flu season, just 37% of Americans got a vaccine, according to the CDC [the Centers for Disease Control and Prevention]. And the flu vaccine has been around for decades, and not been anywhere near as much of a political lightning rod.”

Survey: 'If a vaccine for COVID-19 were available, I would get it' (% agree)

A positive outlook for equities

The development of a coronavirus vaccine is undoubtedly positive for equity markets, even allowing for the headwinds we discussed previously. Without a vaccine, economic activity and corporate profits would continue to be constrained by social distancing and mobility restrictions. The US S&P 500 is expected to see a moderate quarter-on-quarter % decline in earnings in the fourth quarter of 2020, before reporting accelerating growth as 2021 progresses.

Consensus forecasts[i] were pointing to this trend even before the positive vaccine data was released, which implies that the news was already discounted. Therefore, the bigger question relates to internal market dynamics; principally the rotation between growth and value stocks and/or the previous coronavirus winners and losers. 

Value vs growth

Immediately after the announcement of the first successful phase III trial by Pfizer and BioNTech on 9 November 2020, value stocks, measured by the Russell 1000 Value Index, meaningfully outperformed the Russell 1000 Growth Index.

While there will be commonality, not all growth stocks could be defined as COVID winners, in the same way that not all value stocks were necessarily COVID losers. Nonetheless, it can be expected that the value rally has further to run, as those industries which were amongst the worst hit by the coronavirus disruption will benefit the most from a continued return to economic normality.

We believe value stocks will perform well in 2021, because they typically perform well when growth has been scarce but is recovering, and when longer-term interest rates are rising more quickly relative to shorter-term rates. Both conditions can reasonably be expected in 2021 and the growth to value rotation is likely to persist in 2021.

Stock picking will, as ever, be key.

While many sectors and stocks can be viewed as cheap on a relative basis, there are likely to be many 'value traps' within these areas. These are stocks which are cheap for a reason and could become even cheaper, creating a deceptive illusion of value.  

Similarly, certain growth areas have not shared in the general outperformance of growth stocks, driven by large technology companies and businesses benefiting from a working from home/staying at home environment. These growth laggards could include areas such as the healthcare equipment sub-sector of the S&P 500, which barely kept pace with the broad index during 2020 as elective surgeries were postponed. These sectors have room for earnings expansion in 2021, even if they are nominally termed as growth stocks.

Another day, another declining dollar

The other major development we can expect to see in 2021 is a continued decline in the US dollar. The US dollar typically acts as a counter-cyclical currency; it weakens as economic growth accelerates and vice versa.

It is also a safe haven during times of stress and was therefore a major beneficiary of March’s coronavirus induced panic.

Fear has now moderated and an economic recovery is anticipated in 2021, so it is reasonable to expect the US dollar to remain under pressure. Meanwhile, the US Federal Reserve will continue to offer as much monetary support as needed. The move towards targeting an average inflation rate, thereby allowing inflation to run at a higher level in order to make up for any previous undershooting of the target, will ensure policymakers are in no rush to raise rates.

Investors should therefore carefully monitor their exposure to the US dollar and consider either moving their portfolios back towards their base currency and/or increasing their exposure to non-US dollar currencies. While some may feel that the US dollar’s weakness since its March peak may have run its course, we disagree; 2021 is likely to see a continuation of this weakening trend.

Asia’s response and resilient recovery

Such was the economic impact of the lockdowns forced by the pandemic, that only five economies are expected to have reported economic growth in 2020. Chief amongst them is China, which is testament to its strong response to the virus. The country employed mass testing at an early stage, imposed a mandatory 14-day quarantine for travellers, and displayed a strong willingness to implement stringent lockdowns at the first indication of a virus outbreak.

We believe Asian economies will continue to outperform economically in 2021. According to the IMF World Economic Outlook projections, China is expected to deliver economic growth of 8.2% in 2021. While this is behind India’s forecast 8.8% pace, India’s economy contracted in the region of 10% in 2020, significantly behind China’s moderate expansion.

As shown by the Bloomberg Resilience Rankings, many Asian countries have handled the pandemic well and entered 2021 in reasonable economic shape. It was noticeable, as 2020 drew to a close, that many Asian currencies displayed strength, partly courtesy of the weak US dollar and strong Chinese renminbi. This gives Asian policymakers more latitude to ease monetary policy in the coming months in order to support their economic recovery.

Equity valuations in Asia are trading at a meaningful discount to other regions, in particular the US, and we therefore expect that in aggregate, Asian stock markets will outperform the US in 2021. 

In addition, in November 2020 Asian countries signed one of the biggest trade deals ever seen, reducing barriers for a region which spans a third of the world’s population and economic output. The Regional Comprehensive Economic Partnership (RCEP) could add US$200bn annually to the global economy by 2030 and although India withdrew from the talks in 2019, it marks the first ever free trade deal between China, South Korea and Japan. Ultimately, this improved economic environment, combined with attractive equity valuations, is likely to spark further interest in the region’s stock markets during 2021.

Follow the money

In summary, as we look towards 2021, we expect:

• Asia and China to lead the way economically, helping the Asian stock markets to outperform
• The growth to value rotation to persist
• The US dollar to continue trending downwards.

Our Canaccord Genuity investment experts will continue to monitor economies and markets around the world and keep a close eye on the vaccine rollout. If 2020 has taught us anything, it is to be prepared for the unexpected and we are well placed to change our investment strategy on behalf of our discretionary clients if the outlook changes.

Read our other 2021 investment themes:

• Just too big? Will the technology titans hit a wall of regulation in 2021?
• Interest rates: the hunt for investment income
• Politically motivated – how politics and investments work together.