With many equity markets effectively being kept on life support through 2020 by government stimulus, JP Morgan Asset Management global strategist Patrik Schowitz said towards a growth-led recovery from the COVID pandemic could be a bumpy one.
“In terms of the key 2021 market issues to watch, we expect some turbulence, as markets have to transition from a policy driven world to one more driven by a real economic and corporate recovery,” Mr Schowitz said.
“That may cause volatility and rotation under the surface, including rotation towards value from growth.”
Despite subdued economic activity on account of the crisis, Mr Schowitz said inflation remained a risk coming into the new year given the ultra-low interest rates and bond-buying programs embarked upon by central banks.
“Inflation is a key risk investors are worrying about, on the back of aggressive monetary and fiscal policy,” he said.
“We think it’s more of a long-term risk, as there’s still too much slack in economies for inflation to pick up significantly in 2021 beyond a few short-term spikes due to supply chain issues here or there. But there will be strong base effects in the first half, so the market could get concerned.”
JP Morgan Asset Management global strategist Kerry Craig agreed that inflationary pressures were “one to watch” given the strong economic rebound expected in the second half of the year once large swathes of the global population were vaccinated.
“Inflation that rises faster than expected and pushes bond yields higher is another one to watch, as is the potential for a stronger economic outlook in the second half of the year to lead the market to price the risk of monetary policy tightening and possibly revive a 2013 style ‘taper tantrum’,” Mr Craig said.
“However, while these are risks worth monitoring, they do not form our base case of steady economic improvement and modest inflation over the course of the year and a backdrop of relatively better political predictability than experienced in 2020.”
Mr Craig added that with the political turbulence sparked by the US election and the end of the Brexit transition period having now subsided, the speed of vaccine roll-outs would make or break the global economy in the coming year.
“Without the wide distribution of vaccines, the paths of COVID and the economy are locked together, given the impact on social mobility and economic curtailment,” Mr Craig said.
“This link will be broken as immunity levels rise into the middle of the year, but until then the economic path will be bumpy over the first quarter.”
