The global economy continued its road to recovery in 2021, as the most severe economic impacts of the COVID-19 pandemic gradually receded. There were fresh waves of infection during the year, but the public health actions taken to counter them were less economically damaging. In the meantime, fiscal and monetary policy remained at extremely accommodative levels, supporting strong risk-asset performance.
Even as broad equity indexes remain close to their all-time highs, the proportion of stocks in their own ‘bear market’ has recently increased, particularly among speculative growth stocks.
This week, the Federal Reserve, the Bank of England, and to a lesser extent the European Central Bank all acted to tighten monetary policies. These tightenings came as inflationary pressures have surged in many countries and as other central banks have looked to rein in simulative policies. But, when combined with above-trend growth expectations next year and central banks’ likely cautious tightening approach, we suspect financial conditions will likely remain accommodative and supportive of risk assets.
No. While there is no danger of the fiscal floodgates opening in Europe, the ‘traffic-light’ coalition of the Social Democratic Party (SPD), the Greens, and the Free Democratic Party (FDP) looks set to oversee some loosening of the fiscal purse strings in Germany.
The US dollar tends to appreciate during two broad economic regimes. One is when the US economy is materially outperforming its global counterparts, attracting capital looking to benefit from the superior US prospects. The other is when growth slows sharply, attracting safe-haven-seeking capital. This is the “dollar smile” model of the currency, and looking at 2022 through this lens suggests some dollar strength may be in store.
No. The results of the strategy review were more about clarifying and making explicit how European Central Bank (ECB) policy is currently run, rather than signalling a radical departure for monetary policy in the single currency bloc.
Fiscal year 2021 saw a continuation of the strong rebound in risk assets, which had commenced in second quarter 2020. This was facilitated initially by positive news from COVID-19 vaccine trials, and then ultimately by their gradual rollout, which established a path back toward economic normality. Meanwhile, both fiscal and monetary policy remained at extremely accommodative settings.
The historic milestone reached when the white smoke emerged from Brussels and London on 24 December 2020 represents the end of the beginning in the establishment of the new relationship between the UK and EU, rather than an end in itself. Nonetheless, with the lingering threat of a tumultuous no-deal exit now removed, the headwind that this represented to the performance of UK assets has now subsided.
The onset of the COVID-19 pandemic caused steep declines in risk markets in first quarter 2020. Safe-haven assets, such as core sovereign bonds and gold, performed strongly during this period and have held on to much of their gains. Large-scale intervention by both monetary and fiscal authorities eventually put a floor under risk markets, driving rapid recoveries and pushing equity markets to new highs.
As 2020 comes to a close, we expect some key investment drivers to persist into next year. While our views speak to many different challenges confronting investors, including the poor bond yields on offer, the fate of US-China relations, and where to find growth, they are rooted in the belief that 2021 will be a year of healing for the global economy.