Share prices generally rose slightly this past week. So far this year, the MSCI World equity index has gained about 2.3% in US dollars.
Giant new US stimulus package
There were already high expectations last week that Joe Biden would unveil another large relief package, totalling around USD 1.5 trillion. Now the amount has been raised to around USD 1.9 trillion. It will include another USD 1,400/person direct payment to most Americans, USD 400 billion for COVID-19 vaccinations and testing and USD 350 billion in aid to state and local governments. This is in addition to the USD 900 billion relief package that Democrats and Republicans in Congress struggled to enact in late December.
Looking ahead, the big difference is that Biden now has a bigger chance to push through his policies. This is because after two Senate runoff elections in early January, the Democrats enjoy majorities in both houses of Congress. Aside from relief packages, there are expectations that the new administration will not only re-join the Paris climate agreement but also carry out a paradigm shift in the form of environmentally friendly policies and green investments over the next 10 years totalling another USD 2 trillion, which now need to be approved.
In all, the US will have spent nearly USD 4 trillion for crisis response and stimulus measures during the pandemic. This is more than four times as much as the relief packages in the wake of the 2008 global financial crisis.
Testimony by the US Treasury Secretary-designate
Former Federal Reserve chair Janet Yellen, who is Biden's nominee for Secretary of the Treasury, told Senators at yesterday's confirmation hearing that passing the new USD 1.9 trillion stimulus package was an urgent priority. "Without further action, we risk a longer, more painful recession now and longer-term scarring of the economy later. The most important thing we can do today to put us on the path to fiscal sustainability is to defeat the pandemic." As for currency policy, Yellen is expected to revert to America's previous "hands off" attitude, abandoning Trump's attempts to weaken the dollar to make US companies more internationally competitive. She has said that neither the US nor any other country should actively manipulate its currency.
Slower Swedish krona appreciation
The Riksbank announced that it will now build up its own foreign exchange reserves and re-pay loans totalling SEK 180 billion from the National Debt Office by selling about SEK 5 billion worth of kronor per month to buy foreign currency over the next three years. As a result, we have adjusted our currency forecasts and now expect a slower appreciation of the krona towards 10.00 per EUR and 8.00 per USD this coming summer.
China is accelerating
China is a big exception as we sum up 2020. Gross domestic product (GDP) growth for the full year was "only" 2.3% (6.5% year-on-year in the fourth quarter), but this is still impressive. Although it is the country's weakest GDP expansion since 1976, it is not negative as in most other major world economies. China also reported a record-sized trade surplus in December, with exports climbing 18% higher than a year earlier – a clear sign that the recovery is accelerating in Asia. Companies have resumed production and households are consuming, though with a cautious time lag. China's journey to recovery in 2020 may be the world's journey in 2021.
Report season under way, with hopes of better-than-expected earnings
Publication of fourth quarter 2020 corporate reports began last week with some of the major US banks such as Citigroup, JPMorgan Chase and Wells Fargo. Although they surpassed expectations, these reports did not result in large movements in their share prices. Strong earnings will be needed in order to defend valuations. Market expectations for companies in the broad S&P 500 index of US equities are that fourth quarter 2020 earnings will average 6.8% lower than earnings in the last quarter of 2019.
Our market view
COVID-19, vaccines and stimulus measures will set the tone for 2021
The stock market
Vaccines and stimulus measures will provide support for the economy and for markets. Due to the pandemic, we expect early 2021 to be weak. In many places, there is a risk of negative GDP growth during the first quarter. As economies reopen, central banks keep key interest rates and bond yields low and fiscal policy makers continue to enact expansionary budgets and relief packages, we can expect another good year for stock market returns. Because of low interest rates and yields, there are also few other alternative sources of returns.
We expect the Stockholm stock exchange to keep climbing, but with substantial risks of turbulence along the way this year too. Given positive economic growth, we expect cyclical shares to show good potential, at the same time as environmental technology shares will continue to enjoy a tailwind.
Many currencies are trading at close to our equilibrium rate forecasts. This suggests small exchange rate movements. We expect the Norwegian krone and the Swedish krona to appreciate, although the Riksbank's decision to build up its own foreign exchange reserve will slow the rise of the krona.
Valuations of financial assets are already fairly high from a historical perspective. This normally limits upside potential and makes markets more sensitive to negative news. But if growth and corporate earnings forecasts prove correct, we do not regard valuations as a hindrance. Given the encouraging overall economic outlook, we are sticking to our recommendation of an overweight in equities and other risk assets. Meanwhile tolerance of setbacks in a still-fragile world is limited. Historically high pricing after the sharp upturn of the past year is thus a good reason for caution in a short-term perspective.