Economic and market snapshot - December 2020

As we closed out 2020 it was clear that the COVID-19 health crisis was far from over.

Tragically the COVID-19 pandemic has now taken over two million lives and the measures to try and contain the virus have also had devastating consequences on many businesses and livelihoods. Despite this, at the end of 2020, a more positive outlook for the global economy seemed to lift investor sentiment and share market returns were boosted as a result. Global shares returned 10.6% (hedged) and 5.7% (unhedged) for the 12 months to the end of December 2020 despite the deepest global recession since World War II.

What’s driving the positive outlook?

Stimulus measures

One key reason that the markets recovered strongly is because of the large, swift and well-coordinated, fiscal and monetary policy support. The unprecedented scale of assistance lifted returns well above the levels we would normally associate with a deep recession.

Going ahead, we think that global policy makers will continue to pump in support to drive stronger economic growth and jobs and keep inflation low for some time. In Australia, government support is at historic highs and, in the US, the new Biden Administration proposed a large additional fiscal support package. This has boosted confidence that fiscal policy will continue, providing markets with a solid foundation for 2021.

Vaccine rollout

The December 2020 quarter saw very positive vaccine trial results emerge from Moderna, Pfizer-BioNTech and AstraZeneca and also the start of the vaccine rollout globally. That said, there are large divergences in the rollout, with Israel and the UK leading with their programs while other countries lag.

While vaccines alone will not halt the pandemic, the increased levels of certainty they provide about how we may start to control the virus are an important ‘shot in the arm’ for global growth prospects in 2021 and have been key in driving a shift to a brightening outlook from investors.

Acceleration in the shift to the new economy

The pandemic accelerated intense shifts in how economies and societies operate as millions were forced to work, learn, purchase and socialise remotely. Global trends that had been in place for some years, such as online retail sales, intensified and returns in this sector were boosted as a result.

Many technology exposures benefited from the pandemic and the ‘tech superstars’ (the ‘FAANG’ stocks - Facebook, Amazon, Apple, Netflix and Google), dominated share market performance in 2020 along with emerging energy platforms such as Tesla. These markets are now entering 2021 fully valued for solid growth.

Markets like Australia and Europe with a limited technology exposure and more of a tilt to traditional ‘value’ stocks such as energy, property, materials and financials (banks) struggled for most of 2020 but as the year closed out, and the growth outlook brightened and broadened, these markets and sectors also started to recover as earnings improved.

Where to from here?

As we enter 2021, there is good news on the horizon for financial markets for the year ahead. We believe that the global recovery will continue for some years to come. In the shorter term, the economic recovery and markets may pause and consolidate through the first half of 2021 but as the vaccine rollout improves, a lift in growth over the latter part of 2021 and into 2022 should unfold, boosting superannuation returns.

Source: IOOF Investment Services Ltd

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