Vaccinations and Valuations Part 1
It was just after Chinese New Year in 2020 (54 weeks ago), that China went into full lockdown, we sharply downgraded our global growth forecasts and began to think seriously about the potential consequences of COVID sweeping the world. And this Friday will be the one year anniversary of the pre-COVID peak in global equity markets. Readers may recall the mood in global equity markets during the inter-regnum: strongly bullish despite elevated valuations and the new virus threat.
Sound familiar? Only this time round we are building towards a different kind of “crash”: the stars are now aligning for US bond yields to get back to their pre-COVID level – and maybe a bit beyond - much sooner than anybody expected. And for the level of global output to go solidly above trend over the coming year for the first time since the GFC. That will have major consequences for many other asset prices, but we don’t think it’s an immediate recipe for equities crashing “back to earth”. To begin with capital will flow differently within riskier assets rather than from risk to safety. Here are the key points behind our outlook:
1) The Fed is not your friend if you own longer-dated bonds. Their priorities now align with those of the Biden economic team: to get back to super-full employment (the “high pressure” economy) as soon as possible. Inflation can go hang for now. This isn’t just academic wonkery it’s seen as a moral duty (that happens also to be politically convenient for the new administration).
2) The new mutant strains of the virus will have the paradoxical effect of accelerating the global vaccine rollout and, on balance, fuelling a stronger renaissance in global growth. There will almost certainly be a burst of “transitional” inflation to with the coming boom.
3) The political dynamics of the pandemic are changing. Pent up demand for a return towards more “normal” life in the West is colossal and palpable, even if not precisely measurable. It will likely overwhelm the residual caution of the epidemiologists, who we think are still using overly conservative assumptions in their modelling of future cases and deaths.
In Part I we explain some of our pandemic reasoning and why those who have coped best with COVID so far will be the slowest to normalise and vice versa. In Part II we will look more closely at past overshoots in World Wealth versus trend given that asset prices are already far ahead of the real economy.
Investing in 2020 was all about imagination, courage and speed in reacting to an unprecedented and totally unexpected crash in global growth. We expect 2021 to be the year in which the suppressed longings of lockdown get unleashed, and we need to imagine how different assets will react to the coming boom.
Happy Year of the Ox. There are likely to be plenty of surprises.