Newsletter
Rob Hayward
January 2021
Economic conditions
The world economy is gradually emerging from the shock of the Corona virus. Economic activity in China has stated to accelerate. This will also affect other parts of the world. These expectations have resulted in higher prices for emerging economy equities (EEM) and lower demand for government debt (TLT). The resultant rise in bond yields may provide some constraint on economic recovery in the rest of 2021. The economic slowed also makes it more likely that central banks will cut interest rates.
Economic growth in a number of emerging economics such as India, Mexico and South Africa has been lower than had been anticipated. However, there are signs that economies are gradually responding to fiscal and monetary stimulus. The rate of growth of international trade has been disappointing. The continued US-Chinese trade dispute and the effect of extreme climate conditions in Africa and elsewhere are factors clouding forecasts moving forward.
Projections
| Indicator | 2020 | 2021 | 2022 | 2023 |
|---|---|---|---|---|
| World growth | 0.0 | 1.0 | 3.3 | 3.5 |
| US GDP | -3.0 | 2.0 | 2.0 | 2.2 |
| US Inflation | 0.0 | 1.5 | 2.0 | 2.0 |
| US Unemployment | 20.0 | 15.0 | 10.0 | 5.0 |
| US bond yield | 2.0 | 1.8 | 2.0 | 2.2 |
Upcoming events
US interest rate outlook: the central bank projects stable to rising interest rates in the coming year. However, many market participants believe that, as has been the case since the Global Financial Crisis (GFC) disappointing US economic activity and low inflation will cause a change in attitude at the central bank and the possibility that US interest rates may remain lower for longer.
US Presidential elections: The victory for Joe Biden in the US Presidential election means that some international stability and more cooperative conditions are anticipated in the year ahead. However, the Democratic Congress and the new President are expected to maintain pressure on China for an opening of markets and a relaxation of domestic political restrictions. There is scope for trade disappointment.
Assets
Stocks US and (to a lesser extent) other international stocks are already pricing in recovery. There remains some risks that optimism is already overly-extended.
Bonds Government bonds face large finding from the Covid-19 emergency government measures and, with signs of economic revival, there is risk of higher yields in the years ahead.
Gold (GLD) is well supported by uncertainty and continued risk.