The Tribune

ACTIVTRADES WEEKLY

By CARLOALBERTO DE CASA

www.activtrades.bs

AFTER a black swan event dominated this year, could 2021 see the phoenix rise out of the flames?

2020 is a year that will be long remembered, despite many of us wishing we could forget it ever happened.

The coronavirus pandemic, which first emerged in China, exploded exploded across the world and what started out as a health crisis quickly also became a financial one.

Financial markets suffered the first major hit in March, once investors realised the gravity of the situation and became aware of the impact of the pandemic bringing lockdowns on the global economy. That led to a major sell-off of stocks and of all asset classes tied to risk and saw investors flee to safe havens such as bullion.

In the months that ensued - and owing to the intervention from central banks - stocks staged a recovery. NASDAQ dominated this phase, with shares in Amazon, Apple, Netflix and Tesla posting massive rallies.

In November, the news that multiple vaccines had proven effective against COVID-19 and safe to use gave further fuel to the global stock markets rally, with US indices jumping to record highs.

The following month, investors turned cautious once again, mostly on the back of reports of a new spike in COVID cases and a new strain of the virus spreading in the UK. Yet the S&P 500 and Nasdaq still managed to hit a fresh high before the year’s end.

But what will be the main market drivers for 2021?

There might be more downsides caused by the continued fallout from the pandemic and we can certainly not exclude new, unpredictable risks: the so called “black swans”.

All we can do is to take a look at the factors that we are able to predict.

Among them there are various that could boost stock markets.

First, central banks will likely stick to their ultra-expansive monetary policies. Ultra-low interest rates will support the appetite for stocks as investors seek higher yields. This could generate some distortion and could exacerbate rallies on some stocks but at the moment there is no clarity on when, or even if, this will end.

Moreover, after the plunges in GDP that most countries have suffered in 2020, there are expectations of a sharp recovery in 2021. The majority of macroeconomic data has indeed signalled a recovery in the second half of 2020 and most analysts are expecting this trend to continue.

Another positive element is the likelihood of a de-escalation in trade tensions.

The election of Joe Biden as the next US President improves the chances of a smoother relation between the US and both China and the EU.

And finally, after almost five years of debates and discussions, Britain and the EU have agreed the terms of their split. A relatively friendly and constructive post-Brexit partnership between the two blocs would certainly benefit both sides and would help to boost optimism on financial markets.

These factors, in conjunction with any potential fiscal stimulus, will be crucial for the market in 2021. Their development holds the key as to whether a sharp recovery is indeed possible in the next 12 months.

Black swan permitting, of course.