about 3 years ago • 3 mins
The pandemic might not be over yet, but economists with an eye on big-picture economic trends are already raising their glasses to a prosperous new year.
What does this mean?
Now that vaccines are making their way around the world, hopes are high that the pandemic will be a thing of the past soon enough. And as the New Normal™ kicks off in earnest, the International Monetary Fund (IMF) reckons the global economy will rebound from this year’s 4.4% shrinkage to 5.2% growth in 2021. That would take the world’s economic output roughly back to where it was before coronavirus struck. The IMF’s expecting emerging markets to do the best out of that resurgence, with China and India expected to grow by as much as 9%. That’s a far cry from the US’s 3% and the eurozone’s 5%...
Why should I care?
For markets: The best laid plans…
Steep drops in economic growth have historically been followed by sharp recoveries, but the finer details of what comes next are fuzzier. Most economists are expecting more government spending to help boost growth, which might cause inflation in the prices of goods and services. If prices climb by too much, too quickly, central banks will probably increase interest rates to make borrowing more expensive – in turn discouraging people from spending money and causing prices to shoot up anyway. In other words, there’s a risk the move could slow down economic growth, rather than accelerate it.
The bigger picture: So much for a common enemy.
Geopolitics will have a major influence on the global economy next year too, what with the ongoing drama in some of the world’s biggest countries. Between the impact of Brexit on the UK and Europe, the fallout of the trade war on the US and China, and the questions around who will control the US Senate, even the world’s best economists could see their forecasts rendered moot at a moment’s notice.
Keep reading for our next story...
Economists’ optimistic predictions are music to investors’ ears: they think there’s an over 70% chance stocks will be all-singing and all-dancing next year.
What does this mean?
A pick-up in the economy should create a healthier environment for share prices going forward – especially cheap-looking “value” stocks and “cyclicals”, whose fortunes rise and fall with economic growth. And while company profits themselves might take a while to recover from this year’s slump, Goldman Sachs argues that profit growth should – just like it has after past recessions – rebound strongly, spelling good news for stock prices.
Commodities should do well too: a bump in demand for things like oil and copper could outstrip supply and push up prices. And with central banks’ bond-buying programs showing no signs of letting up, there’s not much to suggest bond prices will collapse any time soon either.
Why should I care?
For you personally: Easy pickings.
Just as the biggest tech stocks almost single-handedly drove this year’s rising US stock market, a positive outlook doesn’t necessarily mean stocks and bonds will climb across the board. So as you set out your stall for 2021, you might find you’re better off investing in exchange-traded funds that track a basket of, say, cyclical or value stocks, rather than buying into individual assets. That way you stand to benefit from wholesale rises without risking it all on one or two big names.
The bigger picture: What goes up doesn’t have to come down.
Stocks tend to see a particular pattern during economic recoveries: an initial bounceback where everything heads in the same direction, and then rises and falls based on a company’s individual merits (or “fundamentals”). Plenty of firms, then, could do well in the short-term, but the ones that are able to grow their earnings might really set themselves apart from the crowd…
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