Beyond 2020 – What does 2021 have in store?

With less than a month left in 2020, broking firms, analysts and market economists start releasing their crystal-ball predictions for 2021. Most of these predictions are fairly stock-standard, such as “Goldman Sachs expects the S&P 500 to surge 19% from Monday’s close to 4,300 by the end of 2021, with gains tacking on an additional 7% to 4,600 by the end of 2022,” while some predictions lean more towards the “outrageously impossible” corner, for example Trump defeating Democrat Hillary Clinton in the 2016 election.

In this article, we will use the in-house “Inside Investor Crystal Ball” to spit out five themes we think are likely next year. As a starting point, the table below shows the annual performance of each asset class in investment markets. For each year, the values are shown in ranked order – the best performer appears at the right of the table, and the worst performer is to the left.

Prediction 1 – Emerging Markets at centre stage

Without doubt gold bullion was the star performer for 2020. Why gold, when it holds no intrinsic value and doesn’t have cash flow? Because gold is considered a safe-haven asset and a hedge against inflation, investors begin to hoard gold in times of panic and rising inflation. With central banks printing money like toilet paper due to COVID-19, the global money supply is increasing rapidly.

If history is anything to go by, emerging markets often outperform every asset class following a “black swan” event. And during such an event, people panic and buy gold. With the distribution of a COVID-19 vaccine already taking place in the UK, it should herald the end of Coronavirus and trigger a swift global economic recovery, and signs of this already taking place are starting to show. Inflows into emerging markets hit a monthly record in November. There is growing confidence that emerging markets will see further gains in 2021 as central banks in these countries will be less inclined to lower rates as economic activity fires in some of the hardest-hit economies. The impact of the crisis was a lot more pronounced in emerging market economies that had initial weaker fundamentals and a collapse in world trade as well as tourism.

Prediction 2. Tech supremacy

Tech will not only reign supreme, but it will permeate right through to every sector of the economy. With the onset of COVID-19 and the lockdowns that followed, the move to digitisation became one of necessity rather than choice. Traditional bricks-and-mortar retailers shifted online, triggering a frenzy of buy-now, pay-later (BNPL) vendors offering solutions to eventually replace physical cash. And quietly working in the background, the backbone supporting this transition was being built – 5G. The next generation of high-speed mobile data is known as 5G, or “fifth-generation.” It will open a gateway to a new revolution. We’re now at the beginning of the next phase of dramatic technological expansion and social change – the Fourth Industrial Revolution. Think of it as the Digital Revolution. Breakthroughs in tech fields such as artificial intelligence, robotics, the Internet of Things, autonomous vehicles, 3-D printing, nanotechnology, biotechnology, materials science, cybersecurity, energy storage, and quantum computing. These will come to the fore in 2021.

Prediction 3: Oil price recovery

The impact the pandemic had on the global oil price was something the world had never seen. It was the first time in history where oil recorded negative prices. US oil benchmark West Texas Intermediate (WTI) fell from US$17.85 at the start of the trading day to negative US$37.63 (in the futures contracts) by the close.

Demand tumbled at a relentless pace, as the pandemic forced countries to go into lockdown, grounded aircraft, closed shipping terminals and emptied highways. A world awash with oil is what caused a +300% fall in the oil price. Therefore, as a casualty of the pandemic, oil is set to recover even with the push to go green. Fossil fuel-powered cars, buses, trucks, ships and planes aren’t going away anytime soon. The move to electric and hydrogen-fuelled transportation is still a few years away.

Prediction 4: ESG & Impact investing

2021 will be the year ESG and Impact investing will become mainstream and wealth managers offering such exposure will have a point of difference. Throughout the last decade investors have been inundated with ESG funds that have failed to meet expectations, especially with risk/return criteria.

Without a compelling reason to act now, ESG funds often get left behind and have been easy to ignore. That is, until recently. The pandemic proved that companies with a high ESG rating outperformed their market cap-weighted parent index. To add to it, investors are actively seeking investments that have sound principles and do good to the world. ESG investing is ticking all the right boxes for investors seeking to make an impact through their investment decisions. This is why ESG and impact investing will be a major theme next year.

Prediction 5 – Cyclicals over defensives

With three COVID-19 vaccines about to be distributed worldwide within the next few weeks, the message is clear – as confidence returns, shift out of defensive work-from-home beneficiaries into cyclical recoveries.

Widespread vaccinations will spur a cyclical recovery in 2021. The cyclical stocks represent companies that make or sell discretionary items or services that are in demand when the economy is doing well. We’re talking sectors such as banks, airlines, airports, restaurants, hotels, furniture, high-end clothing retailers, and automobile manufacturers. What we saw during COVID-19 was the collapse in share price in all of the above-mentioned categories. And that means… the moment Pfizer (NYSE: PFE) and Moderna’s (NASDAQ: MRNA) vaccine hit Aussie shores, expect a violent investor rush to buy cyclical stocks, a move that should last well into 2021.

Ishan Dan

Ishan is an experienced journalist covering The Inside Investor and The Insider Adviser publications.