Although the end of the crisis is potentially now in sight, the path to recovery may well still be bumpy over the coming quarters as governments grapple to control the virus. Seasonal factors make this more difficult through the winter.
The three announcements of effective vaccines is evidently a major milestone and a credit to science to get this far so soon. Attention now turns to how quickly they can be manufactured, distributed, and administered on a mass scale. There remain logistical challenges, but one has to believe that this is certainly positive progress.
Governments and central banks continue to support economies globally and have carried them through the worst of the COVID-19 crisis. The vaccines provide hope that an end is in sight, which should give policy makers the confidence to do more in the coming months.
In addition, we continue to see a strong recovery in Asia, and in particular China. Not only has this region been more successful in containing the pandemic, but structural growth prospects are also in its favour. We still believe that we could see a progressive recovery in a return to synchronised global growth over the next 12-24 months, with equities continuing to perform well relative to other asset classes as bond yields remain low. The extraordinary debt burden for companies and governments coming out of the pandemic is likely to result in an extended period of low interest rates and continued central bank asset purchases.
There are of course various scenarios that could provide unwelcome headwinds to the recovery. The global economy does still remain vulnerable to rising COVID-19 infections and the potential for further lockdowns. Lockdowns evidently have a catastrophic effect on economies and without the support of central banks and governments the current situation would be a lot worse.
Across the pond
Near term political risks continue to exist. Despite the US Election passing without too much drama, the recent events on Capitol Hill highlighted that President Trump seemed unwilling to go quietly. The prospect of a less confrontational presidency under Joe Biden has pleased markets. However, now that the Democrats have control of the Senate, the potential for higher taxes and a tightening of regulation for technology and healthcare companies is more likely. In the meantime, though, the expectation of further stimulus should continue to support markets.
Elsewhere, credit deterioration and near record low bond yields, in some cases negative, continue to create some sort of bubble in bond markets. Many commentators believe market valuations in earnings estimates remain too high. Much depends on the strength of the underlying recovery.
Our central case for 2021 is a vaccine rollout in the first half of the year, followed by a robust recovery in the second half. However as mentioned previously there are risks to this scenario. We would continue to advocate adopting a defensive stance albeit with a bias towards equity and with a focus on high quality investments.
Senior Investment Manager