A better year in prospect

A recovery in sectors hit hard by the pandemic may lie ahead – but 2021 will still be challenging.

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  1. Charles Stanley

The most significant event over the Christmas and New Year period was the announcement that the UK has licensed AstraZeneca’s Covid-19 vaccine. It is quite likely the other major regulatory bodies of the world will follow suit once they have assessed the data.

This will provide the world with a much cheaper vaccine than the Pfizer inoculation, which is easier to handle and can be rolled out in large volumes. The sooner a large number of people have been vaccinated in any given country, the sooner social distancing and lockdowns can be relaxed.

Investors have been looking forward to recovery in areas like tourism, leisure, travel and hospitality for some time, though in the short term the renewed spread of the virus in Europe and the US has led to more restrictions and intensified economic damage in those sectors. As 2021 advances – and as winter passes to spring in the northern hemisphere – it looks likely there will be better news and some return of business in scarred areas.

Central banks still in charge

It is expected that the leading Central Banks will continue with generous expansions of money supply and substantial buying of government debt to keep interest rates very low. It is also likely governments will carry on borrowing much more at the low rates – and will offer considerable financial help to people and companies. All of this is positive for shares, which have just gone to new highs compared to their depressed April 2020 levels when pandemic fears were at their highest.

Successful take up of vaccines and gradual relaxations in due course will not offset all the damage or change all the trends. Shops were struggling against online competition before the virus struck, and will continue to face intense competition now many more people have taken to the habit of buying through the internet. Landlords will have to accept the need to switch some retail and office space into something else – and will be expected to meet new higher standards of carbon reduction on heating and cooling systems.

Some rents will be lowered by the reduction in demand for space for shops and some types and location of offices. Oil companies will be required to do more to reduce their future output and sales of oil and gas and will need to review the stated value of their reserves. Manufacturers of diesel and petrol cars face an expensive and difficult transition to electric vehicles. Banks have to handle the bad debts and damaged cashflows of companies they have lent to.

2021 will see a new President of the USA adopt a new tone of voice with China over everything from human rights to intellectual property, whilst tilting to a more collaborative approach with the EU, especially over green issues

Stimulus reversing

As the year advances, assuming recovery restarts after the winter lockdowns, attention may shift to discussing how and when the large stimulus measures by both Central Banks and governments are reined in. If this is done too quickly or with too much austerity rhetoric that will be bad news for markets after their bull run. It is more likely governments on both sides of the Atlantic will err on the side of caution over withdrawal of stimulus, conscious that rates are still low and people want to see a decent recovery after the enforced misery of the anti-pandemic measures. Investors will need to be vigilant and sensitive to changes of mood as the year advances.

Asia should also enjoy a good year, with China likely to grow above its usual 6% official trend rate alongside decent performances from the other leading economies. A weaker dollar may continue, with benefits to emerging economies. Overall, the outlook is for a much better year for growth in output, profits and dividends than Covid-19 curtailed 2020. Many investors are still looking for some returns on their money in a world of very little income on deposits or high-grade bonds. In order to make a return more investors will be tempted to take more risks where they can afford to do so.

Charles Stanley wishes readers a happy and prosperous new year.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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