Economics and Strategy
A Strong Global Recovery Leads to Better-than-Expected Forecasts for Economic Growth and Earnings
In the U.S., Jefferies Chief Financial Economist Aneta Markowska expects growth to average at an above-consensus 5.25% next year, with a positive inflection point in January. While she expects the initial boost to come from fiscal stimulus, Aneta believes that by Q2 the vaccine will allow the private sector to take the baton by unleashing pent-up demand in service spending. Meanwhile, she believes ultra-low inventories will continue to drive manufacturing and housing activity and further highlights that financial markets have climbed the wall of worry on the vaccine and fiscal stimulus, and those risks are now gone. The main worry for 2021 is inflation and the Fed, however Aneta doesn’t expect these risks to materialize. Despite stronger demand, she expects inflation pressures to ease on improving supply-side dynamics, both in the labor and goods markets, keeping the Fed from tapering until early 2022.
On a similar note, Chief European Financial Economist David Owen believes that with a vaccine being rolled out we can be much more confident about a strong recovery, albeit with deep economic scarring, from Q2 onward if a no deal Brexit can be avoided. Both monetary and fiscal policy will likely remain very accommodative, with the BoE potentially going negative in 2021. Brexit will bring a fundamental change in the economic geography of Europe, as the UK leaves the single market and customs union of the EU. David further points out that importantly, unlike the GFC, COVID-19 has brought a rapid pace of innovation and spending on pure science and research. Combined with an increasing focus on measures to combat climate change, he expects a rapid pace of company formation and a wave of mergers and acquisitions.
Chief Market Strategist David Zervos highlighted that recent price action has offered a clear view of what’s in store during the upcoming recovery phase of this cycle. He believes the market is beginning to price in what he refers to as “the handoff,” a point in the cycle where monetary policy takes a backseat to private-sector animal spirits. This transition replaces constant Fed support with true, organic economic growth—and marks when depressed expected real returns on risky investments turn the corner and start to rise markedly. David points out that there is a conditioning during the early phases of a downturn that associates dollar strength with system stress and risk-off. However, this reverses course when the Fed finally gets the monetary policy stimulus level calibrated correctly. David expects that as risky real rates turn back up, the USD will be supported, gold will suffer, equities will rally and the curve will steepen.
More specifically within global equities, Christopher Wood, Global and Asia Equity Strategist, continues to recommend a barbell strategy of owning both growth and cyclical stocks. However, if the choice was between owning only cyclical or growth stocks in the next three months, he would prioritize cyclicals. Christopher believes the American economy will be more resilient than many assume even without yet another fiscal stimulus. In addition, while the main risk to this view is a further acceleration in deaths in America, Christopher expects the vaccine momentum should continue to cause investors to look beyond this tragedy. From a longer-term perspective, he continues to prefer Asian and emerging market equities based on USD bearishness and China’s increasing share of the world economy.
Global Equity Strategist Sean Darby echoes that in Q4 global equities benefited from news of successful launches of COVID-19 vaccines as well as the U.S. election proceeding smoothly. Importantly, earnings and GDP forecasts are continuing to be revised up, while monetary policy remains loose alongside a soft USD. He sees this as a perfect backdrop for global equities to outperform other asset classes in 2021. Sean’s 2021 S&P 500 earnings estimate of 180 implies 28% growth vs. 2020 earnings and is 5% higher than the current consensus.