Macro Matters – December 2020

(Source: Merlea Macro Matters)


After the initial shock, perhaps the biggest surprise to markets has been how fears of a systemic meltdown remain unfulfilled.  The initial bounce back was far stronger and sooner than expected, and some sectors of the U.S. and other economies have seen complete recoveries to pre-crisis levels of activity. QE Infinity has turned your savings account into your checking account, the bond market into your savings account, the equity market into the bond market, the venture market into the equity market, while giving rise to the crypto market as the new venture market. In a world post-financial crisis, we have seen a structural move lower in global rates with an estimated $17.0 trillion of negative yielding debt.

The COVID-19 pandemic has only accelerated this trend due to the unprecedented global fiscal & monetary stimulus with Central Bank’s (Fed, BoJ, Swiss National Bank, BoE, ECB) balance sheets expanding by $5.5 trillion YTD from $16.0 trillion to $21.5 trillion (+34.0%), representing the biggest move since the depths of the GFC in 2008. The U.S. 10-Year Treasury opened the year at 1.9% and is down to 0.85%. Yet it’s easy to remain depressed as you look around the world at COVID-19 infection rates, political skirmishes and the spectacular rise in debt. But the swirling cash is boosting asset values like shares, and markets are looking ahead.  Our view is that the economic recovery was going to be dependent on policies that were implemented during the crisis, and thankfully from our perspective, governments around the world have thrown a great

deal of stimulus at the problem. Which we do not believe has been fully felt by the economy yet. Once the stimulus starts flowing through, we believe it’s quite a positive scenario.  Not only for economic activity, (which wasn’t actually broken ahead of COVID — it was quite robust) there’s quite a huge pent-up demand for things like travel and consumption and getting out there.  Now, the news of a vaccine, which would apparently be more than 90 percent effective, is also boosting market sentiment.

So, although COVID cases are still increasing, it would potentially allow equity markets to look forward as they like to do, and in the hope of rapid deployment of such a vaccine, which could boost consumer confidence and cyclical sectors.  I remain cautious on the market’s near-term, with the prospects of a corrective selloff growing by the day. Optimism and investor exuberance are near peak levels which often occurs at inflection points. Having said that, we remain firmly bulls in 2021 and see stock markets climbing further next year, albeit we now have plenty of company who all seem to share this view.


The good news is that monetary policy makers are still on the case.  While the Fed has gone relatively quiet, (not surprising given their big news in September and the November election) other central banks have been responding. Indeed, from the Fed leading the “easing” charge, leadership is shifting elsewhere.  The ECB is expected to add to stimulus in December; the Bank of England expanded its QE programme in November; and the Reserve Bank of Australia lowered its yield targets and significantly expanded QE. These monetary policy backstops will only increase, if economic data disappoints for whatever reason, and, with inflation weak and U.S. fiscal policy unlikely to be on an overly aggressive trajectory into 2021, the Fed is likely to also join the party and increase accommodation further.  And, of course, we can count on better therapeutics and vaccines which could significantly reduce health risks and boost the economy back to normal.

Moreover, central bank actions are keeping bond markets, including credit spreads, very well behaved, which should continue in the coming months. I will be keeping an eye on Treasury yields with a Democratic sweep, but I believe they should remain contained. Overall, I remain constructive on risk assets over the medium term, even if the short term might see further volatility.

In the corporate bond market, we still expect to see more credit rating downgrades to highly leveraged companies in the investment-grade market and a wave of defaults in the high-yield market. After the sharp rally, there is less compensation in the form of extra yield in the market for those risks than just a few weeks ago. We suggest investors avoid too much exposure to lower-rated corporate bonds and focus on issuers with stronger balance sheets that can weather the ups and downs of the recovery.

I wonder if a sharp push higher in the US 10-year bond yield above 1% proves to be the catalyst for a corrective selloff in the stock market? The 1% resistance level could be significant in the event the ten-year bond sells off and the yield rises.


COVID-19 has crushed the near-term inflation outlook. The next couple of months may see a short-term bounce in global inflation, as energy prices pick up and some activities get back to normal after the severe mobility restrictions that dominated April and May. But most major economies have delivered history-making declines in Q2 growth, confirming much of the world was in a deep recession in the first half of this year. Australia will be no different when it releases Q3 growth data in the first week of December. But looking beyond the near term, an inflation renaissance seems increasingly likely. And this has the potential to meaningfully impact the outlook for economies and markets. Some of the catalysts have their foundation in good old-fashioned economic theory. Others are more a product of the blurred and ever-changing global economy we live in.

  1. Massive monetary and fiscal stimulus – Near-zero interest rate settings in most developed economies are underpinning a quite significant pick-up in the money supply. While appropriate policy for the times (and largely filling a demand vacuum), the challenge will be withdrawing this before higher inflation becomes entrenched in expectations.
  2. Demand pressures as economies bounce back in 2021 – Short-term goods shortages as economies recover in 2021 and 2022, and the reversal of some recent government initiatives to support workers (think free childcare in Australia), could also trigger inflationary forces earlier than many anticipate.
  3. Rising supply-chain costs – In the medium term, the need for corporates to wind back the ‘just-in-time’ inventory juggernaut, to diversify supply chains across countries and ensure multiple sources for supply, is also likely to add additional costs that may eventually tilt up prices. The latest UBS Evidence Lab CFO survey finds 77% of US CFOs have been, or are planning to, shift some production out of China.
  4. The end of globalisation – In recent decades, accelerating globalisation, which according to the Bank for International Settlements (BIS) has been cutting global inflation by 1% per year, is now firmly in reverse, courtesy of sustained geo-political tensions (as well as China’s transition from industrial to consumer dominance). World trade has now been slowing for half a decade, China’s wages are no longer falling relative to those in the US and, according to data from the World Trade Organization, import restrictions have leapt from 4% of global imports to over 10% in just the past three years.

If 2021 sees COVID-19 largely contained, and activity picks up moderately as we expect, inflation expectations will more likely start to lift. As the chart below shows, inflation expectations in the US have already rebounded post their pandemic-led collapse earlier this year. Bond yields are yet to respond. But it is precisely that reluctance of central banks to stymie inflation that will likely underpin a further rise in inflation expectations and a gradual rise in long-term bond yields. Even a moderate rebound in inflation will have to be factored into bond market pricing. A steeper yield curve will also help central banks signal to the market higher policy rates are ahead.

However, the desire of central banks to drive up inflation over the coming couple of years almost demands we consider inflation protection now or in the near future.

Listed Property

It has been a big month for the REIT sector – in Australia and globally. Australian REITs have rallied 14.1% in November while the global REIT Index is up 12.2% in AUD terms. It may appear that the low hanging fruit of cheap value has been plucked from the REIT sector, however we expect continued material longer term upside.

An analysis by Morgan Stanley comparing this US REIT rebound to others, suggests that we remain in the very early stages of the recovery. We concur with this and we see several opportunities for meaningful value recovery trades as the economy picks up post COVID. There is arguably a switching opportunity from strongly performing areas of the equity market to reweighting the lagging REIT sector as a longer-term value recovery play. A 2021 rebound appears likely. Yields will also ultimately recover, adding another leg to total return. REITs have a multi decade track record of trading in line with NTA but in many cases remain currently substantially below NTA.

Australian Equities

We have been buying Australian equities since the beginning of April but still see upside. That said the next month or two may see some weakness, so those looking to add should still get the opportunity. Based on consensus expectations, financial year 2020 earnings are expected to decline by 20%, approximating what occurred during the GFC. A lot of bad news has been factored in. But like the GFC, earnings are expected to recover – by 8% in 2021 and 13% in 2022.

ASX 200 Earnings Index – Based on Consensus

Not only are earnings expected to recover, but there is evidence that earnings upgrades are starting to filter through, as companies gain confidence in forecasting future earnings and economic data is not as bad as previously feared. The retail sector has been surprisingly strong as consumers spend superannuation withdrawals, receive government support, and buy the infrastructure to enable work from home. The large miners are due upgrades based on spot iron ore prices. Energy producers should also see upgrades based on the current oil price. Even the banks appear to at least be meeting expectations as bad debts are contained so far. We believe economic and earnings data will continue to improve as the economy opens. Australia’s effort in controlling the virus, leverage to China which is essentially back to work, and massive fiscal and monetary support, should continue to see an improved earnings outlook.


Australian equities have already recovered, the ASX 200 has risen 31% since its March low. Capital gains have occurred against the backdrop of earnings per share (EPS) downgrades, such that the market’s price-to-earnings (PE) multiple on a 12-month forward consensus basis has risen disproportionately to almost 19x. Investors have now started to question whether the market has become too overbought, if not too expensive. To be sure the easy gains have been made, but the rise in PE is very similar to the GFC experience as the recovery got underway. PE’s early in an earnings recovery should be high. Admittedly the PE is higher than the recovery phase of the GFC, but very low interest rates do justify a higher PE going forward, as the discount rate applied to future profits is reduced. Historically, PE falls with earnings recovery rather than a decline in share prices. Apart from showing some absolute upside in the medium term, we also think Australian shares look attractive relative to international shares.

Global Markets

December could mark a transformative month for the global economy as a mass Covid-19 vaccination programme is set to begin. The United States, United Kingdom, Germany, Spain, and many other countries are on track to vaccinate tens of millions of people in December. Other countries such as Canada and Australia will follow suit in the following weeks.

For the first time since the outbreak of the pandemic in late 2019, the global economy has a viable path towards hopefully a full recovery in 2021 with growth to follow in later years. Investors looking for the best stocks to invest in December may want to focus on companies that stand to benefit from an eventual full reopening.  The Dow Jones Industrial Average topped 30,000 for the first time ever in late November as investors finally saw the light at the end of the pandemic tunnel. According to some health experts, the American economy is on track to return to some degree of normality in the back half of 2021.

While no timeline can be guaranteed, as each day passes the pandemic is one day closer to the end. Hopefully, this thesis can help with the process of evaluating what are the best sectors to invest in December. While masking and social distancing may remain in place in 2021, the public will feel much more confident in their desire to travel and make up for the lost time in 2020. They will want to travel by car or fly to visit landmarks or see friends and family. A vaccine and return to some sort of “new normal” also bodes well for consumer spending, especially in certain segments that were heavily impacted in 2020. During the pandemic, consumers spent much less on clothes and apparel, as people who normally worked in an office had to switch to working from home. But a re-opening of the economy means some of these workers will return to the office in some sort of limited capacity. There are plenty of reasons to be cautious, and we will almost certainly see bouts of volatility and market weakness along the way. While there may be some link with reality and the value of stocks, a large proportion of what we’re seeing is a reaction to things seemingly not being as bad as first thought, and also a  desire to pretend things are not as bad as they are.

Within the equity market, a rotation in favour of the “value” style of investing — buying stocks because they are cheap compared with their fundamentals — is under way. This is a big development and follows eight years of value underperformance. The question is whether it can be distinguished from the rise in bond yields and the strengthening belief that economic growth is returning. The industries expected to experience significant upside to profits, and the stock prices, are the oil and gas storage industry, integrated oil and gas, oil and gas exploration and production, homebuilders, life and health insurance industries, property and casualty insurance, durable goods, diversified banks, automobiles, and aerospace and defence industries.

For investors, it makes sense to retain sufficient hedges in place against some of the perceived risks including a weaker-than-expected growth environment or the emergence of rising inflation sooner.


President-elect Joe Biden will likely have to work with a Republican Senate majority, limiting his ability to implement the Democratic fiscal agenda. Nevertheless, we expect a $1 trillion stimulus package, potentially enacted before his inauguration on January 20. This is less than half of what we might have seen under a Democratic sweep, but it should suffice for a small positive fiscal impulse to US growth in coming quarters. In the coming week, investor focus will move more intently to the topic of trade, and that is what will make or break the rally at year-end. President Donald Trump has promised that a preliminary trade deal with China is close, but there still is no agreement and the Dec.15 deadline for new tariffs is getting closer. Trump’s signing of legislation supporting the Hong Kong protesters drew a negative reaction from Beijing and adds more uncertainty to trade talks.

The big risk to the market in December is the outcome of trade talks, but economic reports will be important as investors continue to assess whether the Fed was right in ending its rate cuts.

The economy has shown some signs of picking up, and a string of improved data has led economists to look for better growth in the fourth quarter. But the critical driver of growth continues to be the consumer, so holiday sales will be an important indicator to watch. Employment data remains the most important of the economic reports, since a strong labour market is crucial for consumer confidence and spending.

Economists expect the economy added 183,000 jobs in November.  The economy added 128,000 jobs in October, even with the negative drag of 46,000 striking GM workers and the reduction of 17,000 federal government jobs, due to the end of temporary employment for Census workers.  Economist estimated 36,000 to 40,000 were left out of the report in October, and they are to be counted as part of the November report. Much of that is going to be seen in private payrolls and especially in manufacturing payrolls. October, ISM manufacturing activity improved, and even though it remained in contraction, some economists said the slowdown may be showing signs of bottoming. The ISM index is expected to be at 49.4, still shy of 50, which shows expansion, but better than October’s 48.3. October’s durable goods report showed a surprise gain in business investment when economists had expected to see contraction. Markets appear to be looking past the worsening pandemic and increasing lockdowns with the hope that a new vaccine(s) will allow for a more permanent reopening and a better 2021. In the near to intermediate term, a correction can be expected at any time, whether it be a “sell the news” reaction or something more concerning. Sentiment measures such as equity put/call ratios and fund manager surveys are approaching extremely bullish levels, which can often be a contrarian signal indicating a pullback is in order.

December carries positive seasonal tailwinds for stocks going as far back as the 1950s, but as we saw in 2019, the averages do not always pan out. And 2020 has been anything but average. Markets have plenty of uncertainties to look forward to over the upcoming months, including the third wave virus count peaks and stabilises, the timing of the vaccine, the Georgia runoffs, the size and timing of fiscal stimulus 2.0, and future monetary policy.


European and UK equities fell in October as investors were spooked by the rise in coronavirus cases and subsequent increase in restrictions. Against this backdrop, no sectors in the broad market returned positively. Information technology, energy and health care fell most.  In the Eurozone, the restrictions to contain the virus have once again exacerbated the gap between the paces of recovery in the manufacturing and services sectors of the economy. The manufacturing PMI for November slowed by 1 point to 53.8, while the services component fell 4.9 points to 41.3, indicating contraction. While businesses were feeling gloomier about the present, their expectations of future activity increased significantly.

Eurozone consumer confidence also took a knock in November, declining to -17.6 from-15.5. It now seems apparent that the Eurozone economy will show a contraction in the fourth quarter. On the politics front, the leaders of Poland and Hungary effectively vetoed the European Union’s recovery fund and seven-year budget because the funding is conditional on upholding the rule of law. Negotiations are ongoing, but the intervention raises the risk of delaying members’ access to funds.

Looking beyond the pace of the immediate recovery, sustainable growth seems to be more dependent on digitalisation due to the crisis. This means that countries that have an edge in terms of digitalisation are even more likely to have a stronger structural growth path. Among the countries that do best according to the Eurostat’s Digital Economy and Society Index are Finland, Netherlands and Ireland. Greece, Italy, and Portugal are among the weakest. Sounds familiar? This means that digital infrastructure, connectivity, integration of digital technology, etc. could be as decisive for Eurozone divergence and convergence as fiscal and monetary policies.  With the outlook for fourth quarter growth being negative the recovery forecasted by many economists is now looking more likely to be a W-shaped recovery.

United Kingdom

the UK government once again reintroduced restrictions to contain the latest outbreak of the virus. As a result, it recognised that businesses and households would need continued help throughout the winter and so announced the extension of the furlough scheme to the end of March. The Office for Budget Responsibility forecasts that government borrowing will hit GBP 384 billion this year, or 19.4% of GDP – a figure not seen since the Second World War.

It is thanks to the efforts of the Bank of England (BoE) to keep Gilt yields so low that the government has been able to continue to finance these much-needed support measures throughout the crisis. With the near-term economic outlook darkened by the latest restrictions, and more government spending needed, the BoE announced that it would expand its asset purchase facility by a further GBP 150 billion, GBP 50 billion more than had been expected.

With vaccine news signalling that there is light at the end of the tunnel, uncertainty around the length of the Covid-19 crisis is beginning to fade, which in turn is brightening the outlook for risk assets – despite the difficult winter ahead for the economy. Within equities, the outperformance this month of this year’s losers makes sense, with a return to normality now on the horizon. As the economic recovery plays out, earnings expectations should continue to recover providing continued support for equities.


Unfortunately, the pandemic in Japan has worsened notably since the beginning of October, with the number of new confirmed cases reaching a record high in November as the country embarked on its third wave of infections. The surge in cases threatens to upend the ongoing recovery in household spending. As of mid-November, there had not been a discernible change in national mobility near retail and recreation establishments, which is tied to consumer spending. However, mobility has started to dip lower in Hokkaido where the outbreak has been particularly bad.  Hokkaido policymakers have asked residents of its largest city, Sapporo, to avoid nonessential activity in an effort to curb the spread of the virus. Other prefectures are considering implementing similar measures.  As local restrictions go into place; Japan may ultimately see a drop in mobility and spending throughout much of the country.

The national government is simultaneously encouraging more services consumption yet preparing for a drop in such spending. For example, it is maintaining its subsidy programs for dining out and domestic travel despite the surge in COVID-19 cases. In addition, travel restrictions have been loosened for visitors coming from countries with low infection rates, such as Australia, China, Singapore, and South Korea.  The efficacy of such programs remains in doubt as Google predicts daily new cases will rise to a record 2,400 by December 12, up from about 1,300 per day in mid-November.  As more prefectures prepare to announce additional restrictions, Prime Minister Yoshihide Suga announced that the government would set aside 50 billion yen for businesses adversely affected by local measures to cut hours and limit capacity.  Suga’s cabinet is also putting together another stimulus package that ruling party lawmakers said should be between 10 and 30 trillion yen.  These funds are meant to hold over affected businesses and their workers until a vaccine is made widely available.  Japan’s relatively low infection rates and ample government support should foster a relatively strong recovery. However, already-cautious consumers may pull back on their spending as infection rates move higher.


As economic order is gradually restored, Beijing has started to exit its ultra-accommodative policies. The People’s Bank of China has been more prudent with liquidity injections lately and refrained from using high-profile policy tools, such as the reserve requirement ratio and interest rate cuts. This, coupled with better economic data, has led to onshore bond yields rising back to their pre-Covid-19 levels. With the price of money now neutral, the quantity of money – credit and money supply – is expected to follow suit. This should lead to a gradual convergence of credit and nominal gross domestic product growth in 2021, and a stabilisation in the aggregate debt ratio as a result.

While the PBOC appears to be in no hurry to tighten policy due to muted inflation, targeted risk control for some sectors, such as property, could be stepped up against growing financial imbalances. Fiscal policy is also heading back to normal. Beijing is likely to start by scrapping some emergency measures – it may lower the fiscal deficit target back to around 3 per cent of GDP and eliminate central government special bond issuance. The withdrawal of stimulus will probably be more gradual and data-dependent than monetary policy, to ensure that some supportive measures remain in place to buffer the economy against lingering headwinds. The biggest risk factor in 2021 is still the technology war, this is not just confined to the US and China. Many more economies could become reluctant to use Chinese-made technology because of security concerns.


Almost all commodity prices recovered in the third quarter following steep declines earlier in the year due to the COVID-19 pandemic. Crude oil prices have doubled since their April low, supported by sharp oil supply cuts, but prices remain one-third lower than pre-pandemic.  Metal prices recovered rapidly in response to a faster-than-expected pick up of China’s industrial activity. Some food prices have also risen. Looking ahead, oil prices are expected to increase gradually from current levels and average $44 per barrel in 2021, up from an estimated $41 per barrel this year , as a slow recovery in demand is matched by an easing in supply restraint. Metal and agricultural prices are projected to see modest gains in 2021. The main risk to price forecasts is the duration of the pandemic, including the risk of an intensifying second wave in the Northern Hemisphere.

The pandemic has had the largest impact on energy prices. After plunging in March and April, energy prices have seen a partial recovery, driven by crude oil prices.  However, the recovery has stalled recently amid concerns about renewed COVID-19 infections and their impact on oil consumption. Oil prices are expected to remain close to current levels into next year, staying well below pre-pandemic benchmarks.  In contrast, metal and agricultural commodities have recouped their losses from the COVID-19 pandemic and are expected to make modest gains in 2021.


With the gold price rising to new heights amid the coronavirus pandemic, a shakeout upon the arrival of a vaccine was inevitable. Still, the intermediate-term outlook for gold stocks and the gold price looks reasonably bright because Fed policy is likely to remain ultra-easy for years to come, while policymakers test their new conviction that inflation is no longer a threat. Yet clarity on the near-term outlook for the gold price and gold stocks may wait until the Fed’s Dec. 16 policy update, which could bring a change in its asset-purchase program. The Jan. 5 Senate runoff elections in Georgia also might serve as a positive catalyst for the gold price and help gold stocks regain their forward momentum.  But, depending on the outcomes, they also could serve to deepen negative sentiment. Bull markets accelerate slowly over time, only to accelerate as they mature. With that in mind we predict several spikes in 2020 and 2021, and in 2021 we expect the first but unsuccessful test of former all-time highs. It might take a year or two before a definite breakout above gold’s former highs at $2,000 is a fact. All this assumes no exceptional circumstances like sudden but wild inflation.


While the vaccine news is supportive for the market over the longer term, in the shorter-term oversupply is likely to prevent prices from rising much higher A vaccine will ultimately lead to a recovery of the economy and will trigger higher oil demand. US president Joe Biden could limit shale oil production in the US. And the market is pricing in that OPEC will continue to keep 7.7 mb/d oil off the market during Q1 2021 instead of 5.8 mb/d, which will prevent a new oil glut. All drivers would be supportive for oil prices. Notwithstanding the good news on the vaccine front and hope that the Biden Administration will want to provide sizable stimulus, which is expected to drive demand higher in the US and around the world, the demand side of the equation looks lacklustre in the immediate months due to the impact of the second wave of Covid-19.

Sector 12 Month Forecast Economic and political predictions 2021



The Australian Dollar may be at risk of a short-term pullback.

NAB and CBA predict the AUD/USD to be around 78 cents by the end of 2021. Westpac has the highest forecast with 80 cents, while ANZ has the lowest at 75 cents.


Positive economic news had supported the Australian dollar throughout the week with good news on the jobs front, no change on interest rates and good data coming out of China. However, with the Reserve Bank of Australia (RBA) remaining open to the idea of further stimulus, the economy is not out of the woods yet. Even so, with a recovery in sight and coronavirus contained things look good going into the new year. This pull back comes from a mixture of developments overseas and at home.








If the vaccine rollout is quick and successful, that will weigh on gold prices.

But logistical challenges abound when it comes to mass production and distribution.



Historically, gold prices and real 10-year yields have demonstrated a strong inverse correlation.  And sure enough, as real yields began to rise over the last three months the gold price eased back from its highs. Another important factor that will determine gold prices in the future, at least in the near term, is the coronavirus itself. The second wave has already hit the world, with the number of cases rising daily and many countries reinstituting lockdowns; this, in turn, weighs negatively on already struggling economies. If governments decide on a fresh dose of fiscal and monetary stimulus, gold could continue being the big beneficiary of the Covid-19 crisis.





Metal prices are projected to increase modestly in 2021 following a slight fall in 2020, boosted by the recovery in the global economy and continued stimulus from China.  Those who are willing to risk it should take a better look at oil instead.



Looking beyond the immediate picture to the medium–term, we see the need for additional supply, both new and replacement, to be induced across most of the sectors.


On the demand side, we continue to see emerging Asia as an opportunity rich region. China, India, ASEAN and the global impact of China’s Belt and Road initiative are all expected to provide additional demand.





REITs sold off heavily in March, with investors concerned about the implications of social distancing and online shopping for shopping malls and office buildings. Sentiment appears overly bearish, while value is very positive. By contrast, Global Listed Infrastructure is expensive, which leads us to prefer REITs to GLI.



Following the recent market crash, many office and retail REITs are priced at extraordinarily low valuations and offer generational buying opportunities for long term-oriented investors.


In many cases, REITs have dropped so much that they are now offered at up to 50% discounts to net asset value, which essentially means that you can buy real estate at 50 cents on the dollar.


At these prices, we are very confident that investors who buy today will earn very attractive returns in the long run.



Australian Equities



7200 – 6390


We see 2021 as a year to be selective. Valuations and uncertainty are elevated.


Short term pull-back expected.



Historic market cycles have displayed sharp bounces after large falls. Markets also typically run in response to large monetary and fiscal stimulus and we currently have quantities of both.


The Australian share market is currently on the highest two-year forward EPS multiple in fifteen years. Those forecasts incorporate a significant recovery from the current crisis and arguably do not fully account for some future disruption.


The P/E ratio for Australian markets is now at or nearing record highs. This is an extraordinary outcome whenever it transpires but especially when we are in a recession.





Long-term government bond yields are likely to come under upward pressure from a vaccine-led recovery in 2021.


Positive Inflation Linked Bonds


As we investigate 2021, we see a different outlook. With the likelihood of vaccines for the coronavirus becoming widely available by mid-year, the economy should get a boost as sectors that have been held back by the health crisis recover. There is also the possibility of more fiscal relief for the economy coming late this year or early next year.



Cash Rates


On hold at 0.10%


Governor Lowe has emphasised that the economic recovery depends on health outcomes and how quickly confidence is restored. Unwilling to consider negative interest rates, the RBA is essentially all out of tools to manipulate monetary policy and is now looking to the Government to provide support to the economy through fiscal measures.


Global Markets




Risk to US stocks include concerns about the pandemic, fading fiscal stimulus, volatility around the worsening relations with China.


The post-vaccine recovery outlook should also help non-U.S. markets outperform the U.S. The S&P 500 is overweight the tech and healthcare stocks that dominate the growth factor, while the rest of the world has more of the financial and cyclical stocks that make up the value factor. Investors are likely to favour the relatively cheaper value and non-U.S. stocks that will benefit from the return to more normal economic activity.






Europe’s exposure to financials and cyclically sensitive sectors-such as industrials, materials and energy-gives it the potential to outperform in the second phase of the recovery, when economic activity picks up and yield curves steepen.



After five years of underperformance, we expect the MSCI EMU Index should outperform the S&P 500 in 2021. Europe’s exposure to financials and cyclically sensitive sectors such as industrials, materials and energy, and its small exposure to technology, give it the potential to outperform in the post-vaccine phase of the recovery when economic activity picks up and yield curves steepen.





Although a recovery is expected, it is expected to take at least two years to return to pre-infection profit levels.


Japan, fiscal policy has become supportive, with the government recently approving a second stimulus package worth close to 117 trillion yen ($1 trillion U.S. dollars). However, the country’s structural weaknesses in terms of monetary policy and persistent deflation mean it will likely remain an economic laggard relative to other developed economies.






Chinese stocks have rallied to a five-year high after a survey suggested the nation was recovering from the economic blow of coronavirus.


Rising tension between Beijing and Washington remains a source of concern for investors.



Two key watchpoints will offer clues to the future of U.S.-China relations. The first will be the initial meeting between Biden and Chinese President Xi Jinping, and subsequent discussions about the future of the current tariffs and the Phase One trade deal. The second watchpoint will be Biden’s attempt (and ability) to forge a multi-country alliance to coerce China into improving access to its markets.


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