Jerry Seinfeld implied in a recent, highly recommended podcast with Tim Ferriss that some of his best jokes stem from his general irritability and crankiness.
Ferriss led into that answer by declaring a big part of innovation is saying “You know what I’m really sick of?” In that spirit, we’re sick of the term “post-pandemic world”.
I used it once around April but not since. The title of BCA’s Research’s latest report includes “…Navigating a Post-Pandemic World”.
So we’re embracing our annoyance with that term to hi-light the best of this excellent report by Peter Berezin.
Macroeconomic outlook: The global economy will strengthen in 2021 as the pandemic winds down. Inflation will remain well contained for the next two-to-three years before moving sharply higher by the middle of the decade.
Vaccines And Growth: A Short-Term Paradox?
There is no doubt that the availability of a safe and effective vaccine will bolster economic activity over the medium-to-long term. The short-term impact, however, is ambiguous.
On the one hand, vaccine optimism could reduce household precautionary savings. It could also prompt more firms to invest in new capacity.
On the other hand, the expectation that a vaccine is coming could motivate people to take even greater efforts to avoid getting sick in the interim.
Nevertheless, dark clouds are forming. After a short-lived dip in late November, the number of new daily cases in the US is on the rise again.
But, there are some encouraging signs. The number of new Covid cases seems to be stabilizing. Machine tool orders rose to 8% year-over-year in November, the first positive print since September 2018. Retail sales have recovered from a low of -14% year-over-year in April to around +6% in October. Broad money growth has reached a record high.
The Japanese government is also considering a new ¥73 trillion fiscal stimulus package to fight the pandemic reverse. However, central banks will see through these short-term oscillations in inflation.
Inflation in modern economies is largely driven by services and shelter (goods account for only 25% of the US core CPI and 37% of the euro area core CPI).
Both service inflation and shelter in ation tend to be largely determined by labor market slack (Chart 11).
In its October 2020 World Economic Outlook, the IMF projected that the unemployment rate in the main developed economies would fall back to its full employment level by around 2025 (Chart 12).
While this is too pessimistic in light of the subsequent progress that has been made on the vaccine front, it is probable that unemployment will remain too high to generate an overheated economy for the next two-to-three years.
Global Monetary Policy To Stay Accommodative
Could a vaccine-led economic recovery cause central banks to remove the punch bowl? We think not. Inflation is likely to rise in the first half of 2021 as the “base effects” from the pandemic-induced drop in prices.
Global Asset Allocation: Stocks are technically overbought and vulnerable to a short-term correction. Nevertheless, investors should favor equities over bonds in 2021 given the likelihood that earnings will accelerate while monetary policy stays accommodative.
Remain Overweight Equities Versus Bonds On A 12-Month Horizon
Equities have run up a lot since the start of November. Bullish sentiment has surged in the American Association of Individual Investors weekly bull-bear poll, while the put-to-call ratio (options to sell and buy stocks has fallen to multi-year lows (Chart 15).
This makes equities vulnerable to a short-term correction.
Nevertheless, rising odds of an effective vaccine and continued easy monetary policy keep us bullish on stocks over a 12-month horizon.
Stronger economic growth should lift earnings estimates. Stocks have usually outperformed bonds when growth has been on the upswing (Chart 16).
Equities: This year’s losers will be next year’s winners. In 2021, international stocks will outperform US stocks, small caps will outperform large caps, banks will outperform tech, and value stocks will outperform growth stocks.
The “pandemic trade” is giving way to the “reopening trade.” We are still in the early innings of this transition.
Going into next year, it makes sense to favour stocks that were crushed by lockdown measures but could thrive once restrictions are lifted.
Relative 12-months forward earnings estimates for US/non-US, large caps/small caps, and tech/overall market have changed.
In all three cases, the tables have turned: Estimates are now rising more quickly for non-US stocks, small caps, and non-tech sectors.
Non-US Stocks To Outperform
Stocks outside the US are significantly cheaper than their US peers based on price-to-earnings, price-to-book, price-to-sales, and dividend yields.
The macro outlook also favours non-US stocks, which tend to outperform when global growth is strengthening and the US dollar is weakening.
As we discuss below, the dollar is likely to depreciate further over the next 12 months. A weaker dollar benefits cyclical sectors of the stock market more than defensives (Chart 22).
Deep cyclicals are overrepresented outside the US. Being more cyclical in nature, small caps usually outperform when the dollar weakens.
A Tougher Path Forward For Tech
A key question for investors is how much additional scope today’s tech monopolies have to expand profits. While it is difficult to generalize, two broad forces are likely to curtail future earnings growth.
First, many tech titans have become so big that their future growth will be driven less by their ability to take market share from competiitors and more by the overall size of the markets in which they operate.
As it is, close to three-quarters of US households have an Amazon Prime account. Slightly more than half have a Netflix account. Nearly 70% have a Facebook account. Google commands 92% of the internet search market. Together, Google and Facebook generate about 60% of all online advertising revenue.
Second, the monopoly power wielded by tech companies makes them vulnerable to governmental action, including higher taxes, increased regulation, and stronger anti-trust enforcement.
We do not expect tech stocks to decline in absolute terms since they still have a variety of tailwinds supporting them.
Nevertheless, our bet is that the cyclical shift in favor of value stocks we are seeing now will usher in a period of outperformance for value names that could last for much of this decade.
Not only are value stocks exceptionally cheap compared to growth stocks (Chart 31), but bond yields likely reached a secular bottom this year.
This could set the stage for a period of lasting outperformance for value plays.
Fixed income: Bond yields will rise modestly next year, implying that investors should maintain below average duration exposure. Spread product will outperform safe government bonds. Favour inflation-protected securities over nominal bonds.
Currencies: The US dollar will continue to weaken in 2021. The collapse in US interest rate differentials versus its trading partners, stronger global growth, and a widening US trade deficit are all bearish for the greenback.
If the global economy strengthens next year thanks to an effective vaccine, the dollar should weaken.
Commodities: Tight supply conditions and a cyclical recovery in oil demand will support crude prices. Investors should favour gold over bitcoin as a hedge against long-term inflation risk.
Stay Bullish On Commodities And Commodity Currencies
The combination of a weaker US dollar and stronger global growth should support commodity prices in 2021. Industrial metals outperformed oil this year, but the opposite should be true next year.
While the long-term outlook for crude is murky in light of the shift towards electric vehicles, the near-term picture remains favorable due to the cyclical rebound in petroleum demand and ongoing OPEC and Russian supply discipline.
BCA’s commodity strategists expect the average price of Brent to exceed market expectations by about $14 in 2021, which should help the Norwegian krone, Canadian dollar, Russian ruble, Mexican peso, and Colombian peso (Chart 43).
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