Author: Maha Khan Phillips
There are five key factors that asset managers need to take into consideration as we move into 2021, William De Vijlder tells Professional Investor
1: Moving Beyond Covid-19
Last year, the Federal Reserve and the European Central Bank (ECB) were successful in influencing asset prices as part of their efforts to cushion the shock of the Covid-19 pandemic on the economy. But the arrival of a vaccine triggers a significant decline in uncertainty. It means that people will start to move beyond Covid. The idea that the ECB might announce that the Pandemic Emergency Purchase Programme will stop could bring us to a different world, for example. We have become so used to uninterrupted liquidity injections, and the obvious implications would be that you will expect bond yields to move higher. The sovereign spread is another story; it could cause a widening of spreads. Recent financial history reminds that us that there is a genuine risk when liquidity is removed. In 2013, the Federal Reserve chairman Ben Bernanke triggered the ‘taper tantrum’ by suggesting that the Fed might reduce the pace of its asset purchases. How markets react this time is a question mark.
2: Looking to Growth
In a world with less uncertainty, we need to see growth. The announcement of a vaccine cuts tail risk, and that raises the valuations of risky assets. The expected growth of income and profits for households and businesses are also impacted by the distribution around the growth forecast. We need growth to be balanced, not too strong so as to create a feeling that Central Banks have gone too far in providing accommodation. It can’t be so overwhelming that it has too much of an impact on interest rate anticipation.
3: The Push for Risk
There will be an ongoing push for taking risk. We are in an economic recovery model, and that should be supportive of risky assets. People who are looking at valuations and thinking they are too high will also need to consider that policy rates are at zero. People will just need to accept that.
4: All Eyes on Biden
Another question mark is around what decisions the Biden administration will take, and what they will mean for the US/China relationship, and the US/Europe relationship. We will be living in a more multi-lateral world, but what will happen remains to be seen.
Sustainability and climate risk will be one of the key themes next year, and every year going forwards. It will get more airtime because of the COP26 Summit in Glasgow. The pandemic has brought sustainability even further to the forefront, because companies that did well in terms of ESG were affected less during the stock market selloff in March than other companies. Higher scores in ESG and sustainability imply that these companies are perceived to be more resilient and less risky than others. There is a second aspect to this, and that is around wellbeing. Consumers are more focused on what they are buying, the quality of the food that they are consuming, and their footprint. Companies will be more focused on that, as will the political world. The US pulled out of the Paris Agreement, but now they are back.
William De Vijlder, Group Chief Economist, BNP Paribas