Everyone hopes 2021 and 2022 will be years of recovery. The Covid-19 pandemic that is impacting the world is still causing great uncertainty in people’s future which affects the financial markets. In terms of health, 2020 has been a tragic year, indeed. But, for some of the finance world sectors, it was a year of records.
The Tech sector was the first to reach outstanding earnings. At the outbreak of the pandemic, people were told to stay home. The unknown virus spreads so fast that most companies and organizations had to shift their businesses to homework in order to stop the propagation and prevent the country’s health systems from falling apart. The demand for remote communications benefited Telco and technology companies.
The S&P 500 index has closed its highest record three times this year, one in February during the pandemic debut. The other in August after a bear market driven by shutdowns in March and the latest in September fuelled by government stimulus and the ability to manage the pandemic as the virus becomes more familiar among the scientific community.
The announcement of SARS-CoV-2 vaccine in November made the Pharma sector the most wanted for investing. The advantage of vaccines is that they allow investors to project themselves into the post-pandemic and normalization of economic activity.
Will 2021 and 2022 be the years of recovery?
After a 2020 year to forget, 2021 looks like the year of recovery, but it will not be alone.2022 will also see growth rates that surpass the potential of our economies, as they will still be catching up. So far, anticipating profit evolution, investors are aware of a purview that is emerging and of a possible increase in corporate profit forecasts for 2021 and 2022.
The return of a more favourable economic outlook and the hope of gradual normalization is pushing the sectors most penalized back into the green. But some of these sectors are experiencing structural difficulties which should lead investors to be wary of them. The aviation sector is one. The economic crisis will continue to weigh on air transport in 2021 with a turnover down by 29% compared to 2019. With a low fill rate and deprived of revenue, airlines will therefore see their solidity put under pressure.
It is essential to reduce debt
We must keep in mind that the bedrock of the economic system is coming out weakened by the pandemic. Debt, which was already problematic in many countries, increased sharply to the point that it is becoming vital for many of them.
Sooner or later, we will have to think about getting our fiscal house in order. This will be all the more difficult as the size of many developed economies (particularly in Europe) will struggle to return to 2019 levels.
However, suppose the tax revenue does not increase through economic expansion. In that case, it may have to increase either by reducing State spending (difficult to imagine since the latter will be asked to put everything in place to deal with the next pandemic) or an increase in the tax burden on businesses and households. This will not fail to impact the spending of some and the profits of others and weigh sooner or later on growth.
The return to normality is therefore welcome, but it is certainly not the panacea for all the problems, especially since some of them, such as the excessive indebtedness of economies, inequalities, are not new and have worsened with the pandemic.
The room for manoeuvre of the major central banks is more and more reduced. Even so, there is every reason to believe that they will remain very active in the credit markets and play a crucial role in lowering interest rates to keep the debt burden manageable. Major economies can no longer afford a normalization of interest rates. Their central banks will ensure that. In short, the challenges of tomorrow are already looming.
Equity markets in Europe have a higher potential for appreciation than in the United States, mostly since the latter market remains under the influence of technology equities at a slightly higher valuation.
In the short term, the health crisis will remain a factor to keep an eye on new infections requiring new containment measures, the speed of vaccine deployment, the swiftness and magnitude of the economic recovery. Correction phases are likely, especially after the rapid rebound in prices we have just experienced.
Therefore, it is not necessary for an investor to fundamentally reshape its equity portfolio. If you want to know more, contact one of our Team Network experts based in locations like Belgium, Italy, Spain or Portugal. If you are in any other region, contact Euroconsumers Invest directly. Never walk alone!