Three factors set to dominate investments in 2021

The Covid-19 vaccine, the new US President and Britain’s final exit from the European Union will dominate the investment outlook for 2021, according to Columbia Threadneedle Investments.

William Davies, chief investment officer, Emea, for the global asset management company, said the three themes will set the investment agenda for next year following a tumultuous 12 months as the global economy has grappled with the biggest financial shock since the financial crisis of 2008-09.

“Following unprecedented levels of stimulus and government intervention, the level of debt is going to be even greater than it was after 2009 and we will emerge into a world of low inflation, low growth and low interest rates – such a backdrop is not one where traditional value investing is likely to outperform over the longer term,” Mr Davies said.

Here’s why the vaccine, Joe Biden taking over as US president and the UK finally waving goodbye to the EU, will affect investments in 2021:

Covid-19 vaccinations will kick-start global recovery

Global markets responded positively to the news of an effective vaccine in several countries last month, with the approval from health regulators, starting with the UK this week, providing a further boost to sentiment.

Richard Hunter, head of markets at British investment platform interactive investor, said the focus will shift early next year towards the gap between discovery and distribution of the vaccine on a global scale.

“Not only would a roll-out in the early months be positive in crippling the pandemic, but it would also allow economies to regain some footing and companies to recoup some previously lost earnings,” he said.

“Conversely, delays due to the regulatory bodies, doubts on the vaccine’s efficacy or a slower than expected distribution would threaten investor sentiment.”

Mr Davies said while the end of the pandemic is in sight, the fundamentals are likely to deteriorate before they get better as several economies are still shut down.

His earlier expectation of a U-shaped recovery, with economic activity back to pre-pandemic levels by end of 2022, could change with the rollout of the vaccine leading to a much quicker recovery.

This could be further boosted by an explosion of post-pandemic spending, particularly on experiences such as travel and leisure, driven by a build-up of savings during the crisis when people could not spend as much.

“That should bring forward the economic recovery by as much as nine months, meaning we see a recovery to pre-pandemic levels by early-2022 or possibly even the end of 2021, he said.

The critical thing is to remain invested in companies that are going to make it through and ultimately benefit from the economy reopening, he added.

Biden's victory set to soothe trade relations and boost equities 

Joe Biden’s victory in November delivered a divided US government, with a run-off election in Georgia that could see the Democrats with marginal control of the Senate as well as the House of Representatives.

Mr Davies said Mr Biden appears to be a more stable, consistent leader likely to “heal domestic divisions as well as repair international relationships” through moves such as re-joining the Paris climate accord.

"This will have a positive impact on slowing climate change and aligning the US with other nations,” he said.

“We also expect him to continue taking a tough line on China, but with a different style to the rhetoric and a more consistent approach. Biden will no doubt have a more constructive relationship with Europe too, and Germany and France in particular, which has deteriorated in the past four years.”

Mr Hunter said it remains to be seen if the fractious relationship between the US and China will be more conciliatory under Mr Biden or "whether the damage has been done".

“The fact that the world’s two largest economies may remain at loggerheads could be unsettling for investors and could accelerate the reverse of what had been a strong trend towards globalisation generally," he said.

Mr Davies said a split Congress means Mr Biden’s plans to inject stimulus in the form of a huge infrastructure bill also appears to be off the table.

"We find ourselves in something of a middle ground, which is a reasonably healthy position for equity and credit markets, and certainly one that benefits the likes of US utilities, consumer staples, real estate and tech, but which may have negative implications for financials, energy and health care," he said.

A happy Brexit ending will reboot FTSE100

With the end of the Brexit transition period later this month edging ever nearer, markets are on tenterhooks as to what will happen before then.

“The most likely outcome is that they will come to some sort of agreement – even if elements of that agreement include decisions still to be agreed,” said Mr Davies.

Mr Hunter said institutional investors view the UK as “uninvestable” with much of this down to Brexit uncertainty.

“The release of the UK from the EU removes a potential obstacle, even if the economic prospects make for ugly reading,” he said.

For investors looking to invest in the UK, the FTSE100 has had a chequered history in recent years, adding 7.6 per cent in 2017, before declining 12.5 per cent in 2018. This was followed by a 12.1 per cent rise last year with a fall of about 17 per cent so far this year.

“Interestingly, a spike of over 12 per cent during November suggests that appetite for the index may be slowly turning more positive,” said Mr Hunter.

A positive Brexit ending could also lure back global investors searching for value.

“If a Covid -19 vaccine can be ... distributed early, and if the conclusion of the Brexit talks result in an outcome which does not place undue further pressure on UK companies and therefore the economy, the resultant effect would be positive," he said.