Suez Canal blockage + vaccine export curbs
The giant container vessel that wedged at an angle in the Suez Canal and blocked passage for all ships, was finally towed free on March 29 after nearly a week − thanks to both dredging efforts and high tides. Meanwhile this event demonstrates the risks of bottlenecks in global supply chains. This past week there have been news headlines about weak links in the global distribution of oil (including a backlog of hundreds of freighters and tanker vessels queueing to pass through the Suez Canal), and semiconductors, which are vital to many industries, as well as vaccines. This week the European Commission decided to temporarily tighten export controls on coronavirus vaccines to countries outside of the European Union, especially the AstraZeneca vaccine.
Green American infrastructure package
Under Joe Biden's election campaign slogan "Build Back Better", the president is expected to unveil an Easter present – a new infrastructure package worth about USD 3 trillion. It will include funds for repairing and upgrading roads, railways and bridges as well as improving US digital infrastructure. About USD 400 billion is expected to be spent on green energy and charging stations for electric vehicles.
The package is aimed at making the United States more competitive, while creating new green jobs. This may lead to greater innovativeness and economic recovery, but also to advances in managing the climate change crisis. Meanwhile such spending may boost tensions between the US, Europe and China in their race to become the world leader in the "green transition".
President Biden will also unveil proposals for financing this package, creating more clarity about discussions in recent weeks about potential US tax hikes.
Together with the most recent fiscal stimulus package – the American Rescue Plan – this is the biggest US spending programme since the 1930s, when the New Deal lifted the US out of the Great Depression. Further stimulus packages, focusing on social welfare and health care, are expected late in April.
US labour market data later this week are expected to show continued improvement, although there is some way to go before reaching the pre-pandemic situation. But more jobs should also mean more consumption and thus a stronger economy.
Positive outlook for emerging markets
Provided that COVID-19 vaccines are rolled out, prospects for emerging market (EM) economic growth over the next 12 months look better than in more than a decade, The only real source of concern is that vaccinations, and thus the recovery, will not be as synchronised as the slowdown in 2020 was.
China will be the EM growth engine, and Asia looks set to emerge from the crisis in relatively better shape than Latin America and especially Africa, which will be held back by weak political leadership and governance.
The recovery in the global economy, combined with high commodity prices, will provide support for EM financial markets, but we expect a more limited upturn than during the second half of 2020.
With gradually rising interest rates and bond yields, EM currencies will become increasingly attractive, but there is a major risk of high volatility.
Our market view
Recovery will support stock markets
Strong investor faith in a coming economic recovery is providing support to stock markets, despite concerns about production disruptions and shortages of components, especially semiconductors.
US Treasury yields are continuing to climb, but this does not seem to worry stock market investors either. Most observers, including us, expect continued small upturns in yields during 2021 and believe that sharp earnings increases among listed companies will provide sufficient support to share prices. Excessively rapid and/or large yield increases may of course disrupt this scenario. We are sticking to our cautiously optimistic view of stock markets.
In our main scenario, we anticipate a clear economic recovery starting this spring or summer, with solid growth at least well into 2022.
In an economic recovery, cyclical value companies should be able to regain some lost ground, but looking further ahead the digitisation trend will continue to benefit growth companies. Sizeable worldwide investments in sustainability suggest that last year's strong performance for companies with this type of strategy may continue.
Share valuations today are undoubtedly high from a historical perspective but can be justified by lower interest rates and bond yields as well as a strong earnings outlook. These high valuations limit upside potential in the long term, but they are rarely a good signal to sell in a short-term perspective.
Continued potential, though a lot has been priced in
Given today's low interest rates and yields, it is hard to find good alternatives to stock market returns. Meanwhile, central banks and governments have established a floor by promising continued stimulus.
This suggests that the growth picture will have to become much worse, and/or yields will have to climb much more than expected, for major stock market downturns to materialise. However, profit-taking − with downturns of 10 or perhaps 15 per cent − will still be a natural element of this picture. We nonetheless expect positive, single-digit stock market gains this year.