06.01.2021 10:34

Market Outlook: New lockdowns, but vaccines coming

Our headings about vaccines, stimulus packages and new lockdowns in the last Market Outlook before our Christmas and New Year break remain topical, but this week we are also focusing on purchasing managers' indices (PMIs) and American politics.

Strong ending to 2020

A turbulent 2020 ended with new stock market records in the United States. The broad S&P 500 index gained about 18% in local currency during the year (4% in Swedish kronor), while the tech-heavy Nasdaq Composite index surged by nearly 45% in USD (27% in SEK, since the krona appreciated against the US dollar during 2020). European stock markets, measured by the Stoxx600 index, closed 2020 down slightly (-1.4% in EUR) while Stockholm listed equities ended gaining a respectable 6% for the full year.

New lockdowns, but vaccines coming

Stock markets started the first trading week of 2021 more tentatively. A post-holiday surge in COVID-19 infections is leading to the imposition of new or extended lockdowns in many countries, while awaiting sufficiently widespread vaccination campaigns. The United Kingdom made Christmas headlines by finally reaching a post-Brexit trade agreement with the European Union effective on January 1, but also because a more infectious mutation of the coronavirus emerged there and began spreading elsewhere. Early this week the UK thus announced its toughest pandemic-related restrictions since March 2020, which are expected to remain in place until mid-February.

After approval by the European Medicines Agency shortly before Christmas, many EU countries began vaccinations around December 27. But the roll-out has been uneven, due to vaccine shortages and other delays. How quickly various countries implement their COVID-19 vaccination campaigns will be a crucial factor in forecasts of the pandemic's future impact and the economic recovery that is generally expected during 2021.

Political spotlight on Senate runoff elections in Georgia

This week the occupants of last two seats in the US Senate will be decided. The reason this is important is that if the two Democratic candidates in Georgia win, this will give the party control not only of the US presidency and the House of Representatives, but of the Senate. Democrats and Republicans would each control 50 Senate seats, giving the new Democratic vice president Kamala Harris a tie-breaking vote in her role as Senate president. The election took place yesterday (January 5) but given the large number of postal ballots, final results will not be known for several days. At this writing, both Democrats look set to win very narrowly.

Large US stimulus package, with bigger ones possible soon

Two Senate victories in Georgia would make it easier for President-elect Joe Biden to enact new stimulus programmes, including portions of his planned green infrastructure investments and expanded stimulus cheques for households. The new round of cheques alone would add 2% of gross domestic product (GDP) to the stimulus package totalling about 4% of GDP that both houses of Congress approved on December 21 and President Donald Trump reluctantly signed after Christmas.

The December stimulus package is worth about USD 900 billion and includes unemployment benefits, grants for airlines and vaccine distribution, new small business assistance and direct payments to most Americans.

Manufacturing indicators continue to surprise on the upside

In the euro area, the IHS Markit purchasing managers' index (PMI) for the manufacturing sector rose to 55.2 in December from 53.8 the previous month. When a PMI is above 50, it indicates that purchasing managers expect economic expansion. Meanwhile the Swedish manufacturing PMI climbed to a surprisingly strong 64.9, and a corresponding US manufacturing index reached its highest level in several years.
PMI upturns in a number of countries are being driven by an increase in delivery times, but also by higher demand. It remains to be seen whether hard data on industrial production will bear out this optimism. The equivalent service sector indices, due later this week, are expected to look weaker.

From weakness to strength in emerging markets

SEB's emerging markets economist Per Hammarlund foresees a broadly positive trend in the EM sphere during 2021, assuming that vaccination roll-outs prove effective and world economic growth recovers.

He expects countries with above-average risk such as Indonesia, Brazil and Turkey to benefit first and relatively lower-risk countries such as Russia, the Philippines and Poland to catch up later in the year. China is by far the largest EM economy and the recovery there is already well underway, albeit a bit unevenly.
Watch Mr Hammarlund's 22-minute video presentation here

Our market view

Last spring, few observers expected 2020 to end with broad 10-15% upturns (in local currency) in major stock market indices. After a strong market rally this past autumn, it was not surprising that the year ended with a narrower range of market movements. In recent weeks a new US stimulus package was enacted, and more such packages are likely if the Democrats gain control of the Senate. We also have a post-Brexit trade agreement between the UK and the EU in place. As various sources of political concern have eased, we continue to have a fundamentally positive view of stock markets.

Although the world has suffered a new setback as the spread of COVID-19 increases, encouraging indications – for example about impending vaccination roll-outs and a US election outcome that was well received by investors − help us feel more confident as we look ahead at 2021 and 2022. Our societies will gradually reopen during 2021 and at least partially return to pre-crisis patterns. If we react as we usually do, there should be pent-up consumption needs.

The return to a more normally functioning society and a more robust economic situation will continue to be supported by central banks, which will ensure that there is plenty of liquidity in the system over the next few years and keep key interest rates and government bond yields low. At the same time, both we and the market expect new fiscal stimulus programmes.

Because of sharp stock market upturns since last spring, prices of financial assets are now fairly high from a historical perspective. This normally limits upside potential and makes markets more sensitive to negative news.

Meanwhile this is balanced by a bright medium-term forecast for both GDP growth and corporate earnings. Interest rates and bond yields are also extremely low and are expected to remain so for some time to come, which means there are few alternative sources of returns besides equities. This will create tolerance for higher share valuations.

Given the encouraging overall economic outlook, we are sticking to our recommendation of an overweight in equities and other risk assets, but historically high pricing after the sharp upturn is a good reason for caution in a short-term perspective.