Vaccines and new lockdowns
In the United States, the Food and Drug Administration (FDA) has taken steps towards final approval for roll-outs of COVID-19 vaccines from Pfizer/BioNTech and other pharmaceutical companies. US authorities believe that as much as 80% of the population may be vaccinated by next summer. However, drug makers Sanofi and GlaxoSmithKline announced that their vaccine launch will be delayed until the second half of 2021.
A number of European countries such as the Netherlands and Germany, as well as portions of the southern UK, will impose lockdowns over the Christmas period. Starting today (December 16), Germany will be closing much of the country until January 10, including schools and most shops (but not grocery stores and pharmacies).
Brexit: A never-ending story
The deadline for reaching a trade agreement following UK withdrawal from the EU (Brexit) has again been postponed, and Prime Minister Boris Johnson is calling on the British people to prepare for a no-deal departure from the EU single market on January 1. This is one reason why the European Commission also unveiled its contingency plan on how to act if no agreement is reached in time, in order to ensure that air and road traffic between the UK and the EU will continue operating for the next six months.
SEB Talks: The pandemic's long-term effect on business, climate and leadership
On December 16 at 12.00 CET, SEB will host a discussion with Johan Kuylenstierna, Adjunct Professor at Stockholm University and Vice Chair of the Swedish Climate Policy Council and Anna Niva, Psychotherapist at BrolinWestrell AB − together with SEB Chief Strategist Johan Javeus and Household Economist Jens Magnusson − on the topic of what the pandemic will mean for business, climate and leadership. Register here to join.
Breakthrough for EU budget and recovery package
The deadlock on the EU's big recovery package and long-term budget has finally been resolved, after Poland and Hungary withdrew their vetoes. The new budget, totalling nearly EUR 1.1 trillion, goes into effect on January 1, 2021 and is expected to run for seven years. The special coronavirus recovery fund, totalling EUR 750 billion, is expected to begin providing grants and low-interest loans to EU member countries next year. Last week's EU summit also adopted a new mechanism that will make it possible to withdraw support to member countries that violate fundamental democratic principles.
The European Central Bank (ECB) chose to enlarge and extend the Pandemic Emergency Purchase Programme (PEPP) at last week's monetary policy meeting. The ECB expects gross domestic product (GDP) in the euro area to shrink by 2.2% during the fourth quarter of 2020 but foresees a recovery during 2021 that will continue in 2022.
New climate goals
Having approved the long-term budget, last week's EU summit went on to discuss adopting more ambitious climate goals, for example a 55% reduction in carbon dioxide emissions by 2030 (compared to 1990). EU environmental ministers are expected to put this decision into writing before Christmas.
To help commemorate the fifth anniversary of the Paris Agreement, a virtual climate meeting attracted more than 70 heads of state and government from the 189 countries that signed the agreement. Aside from keeping global warming below 2 degrees Celsius, and aiming at limiting it to 1.5 degrees, the intention of the agreement was to increase climate ambitions continuously and to put forward new targets every five years. For example, China plans to triple its use of solar and wind power over the next 10 years and become carbon neutral by 2060. The United States was missing from the meeting, but Joe Biden has said that the US will rejoin the Paris Agreement as soon as he takes over as president.
Continued US central bank support and potential stimulus package
After its December 15-16 monetary policy meeting, the US Federal Reserve is expected to announce increased stimulative purchases of bonds with long maturities. We also believe that the Fed may signal an unchanged near-zero key interest rate for another three years.
Meanwhile Congress is continuing its negotiations on another US coronavirus stimulus package. Last week the White House presented a proposed compromise worth USD 916 billion. Hopefully, an agreement can be achieved before important federal unemployment benefits expire around year-end, although the Democratic and Republican sides have not yet reached a consensus on such key issues as higher federal grants to state governments.
Good outlook for emerging markets in 2021 global recovery
This will be the first year since the Second World War that overall GDP in emerging market (EM) countries has shrunk, but 2021 looks more promising. Increased economic activity and a global cyclical upswing are expected to boost risk appetite for EM-related investments.
Once COVID-19 vaccines become more widely available, we expect those EM currencies and bonds that are usually the most sensitive to changes in risk appetite – such as those of Brazil, India and Turkey – to temporarily perform more strongly than other EM countries. But when the recovery gains momentum during the second half of 2021, countries with higher credit-worthiness including Poland, the Philippines and South Korea should begin to catch up.
Our market view
Although the world has suffered a new setback as the spread of COVID-19 increases, encouraging indications – for example about impending vaccines and a US election outcome that was well received by investors − help us feel more confident, allowing us to lift our gaze to 2021 and 2022. We will gradually reopen our societies 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 (supplementary budget items and government relief packages). As the recovery strengthens, these programmes will shift from emergency responses to forward-looking initiatives, for example as part of a worldwide green transition.
The capital market has already discounted this, and last spring's stock market declines have been more than reversed. Prices of financial assets are now quite high from a historical perspective. The sharp upturn in November means that various indicators of current thinking among investors are signalling an optimistic view and a general increase in risk in their portfolios. 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.
The weekly Market Outlook newsletter will now take a Christmas and New Year break. Our next issue will appear in January.
We wish you healthy and joyful holidays!