Markets set for a coronavirus vaccine led recovery in 2021

Europe to outperform the US in 2021

George Geddes

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Given the numerous surprises revealed in 2020, a glimmer of hope towards the end of the year in the form of a coronavirus vaccine could be the catalyst for a promising recovery period in 2021.

The majority of the leading economies have come out of the pandemic and national lockdowns reasonably unscathed, according to Russell Investments, which puts them in good shape heading into the new year.

The most notable damage from the outbreak is the rising government debt. The International Monetary Fund (IMF) forecasted the gross government debt for the G7 economies could rise by 23% of gross GDP in 2020. However, Russell Investments argued this will not become an issue in the immediate future until spare capacity is eventually exhausted and inflation starts to rise.

The introduction of a vaccine for coronavirus will put pressure on government bond yields. Dovish central banks in tandem with the lack of inflation pressure will likely limit the rise in yields. Additionally, a significant number of central banks have announced they will not raise interest rates until some time after inflation increases.

“The prospect of a number of effective vaccines being rolled out through 2021 offers an ‘escape hatch’ out of the pandemic and its economic effects,” said Richard Dunbar, head of multi-asset research at Aberdeen Standard Investment. “This leaves us expecting above-average global economic growth over the next two years.”

For other asset classes, the vaccine news has already had a positive impact on equity markets which could spill over into next year, notably for Europe, according to Morgan Stanley.

The firm said much of the European region was being undervalued in 2019, most likely as a result of Brexit, but things were starting to look positive until the turmoil struck putting much of the continent into lockdown.

However, Morgan Stanley does see this upward trending performance seen at the beginning of the year returning along with earnings-per-share growth climbing to 30% in 2021 and 20% in 2022.

The firm is the most hopeful for European exposures with base 2021 target price for MSCI Europe being 11%, and bullish outlook of 20%. This is ahead of its S&P 500 outlook of 10% and 6% for MSCI Emerging Markets.

Nonetheless, there are still rising coronavirus cases in Europe and the US which will be the short-term challenges the two regions will be needing to face. The UK is facing the ongoing uncertainty of Brexit as we approach the deadline of 1 January to finalise a deal. The FTSE 100 has been the worst-performing index in Europe, but this could go in its favour once Brexit is completed and leaves the UK economy at an appealing valuation.

For the wider European region, November was peak infection period for most countries and has meant the eurozone is on track for negative GDP growth in Q4. This does suggest the post-vaccine recovery will be more significant and Russell Investments forecasted the MSCI EMU index to outperform the S&P 500 in 2021.

The outperformance could be partially driven by the S&P 500’s large weighting for stay-at-home technology stocks which have been driven to extremely high valuations which could be hard to maintain post-vaccine.

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There does remain some attractive classes within fixed income which Aberdeen Standard Investment continue to keep exposure to.

Dunbar added: “In bond markets, we still favour high yield and emerging market bonds, but would also hold some developed market government bonds to give balance and diversification to the portfolio. We have recently taken our global investment grade credit positions back to neutral.

“While issuers continue to trade satisfactorily and defaults are low, the continued spread tightening off the March levels leave more meagre returns from here.”


The US dollar is expected to weaken given its counter-cyclical behaviour, typically falling in recovery periods. For other alternatives, numerous commodities could experience a positive year.

Gold reached an all-time high amid the market volatility, surpassing $2,000 an ounce for the first time in August. Despite falling slightly as investors gained confidence in equities again, Credit Suisse predicted gold will reach record highs again.

Discussions surrounding inflation, albeit not immediate, could see investors turn to the yellow metal again as an inflation-hedge, particularly if US real yields drift even further into negative yields.

Oil is another alternative Credit Suisse sees some potential for growth, having not yet recovered to its pre-coronavirus levels. The firm said oil demand is outpacing supply and so inventory normalisation is under way but this process takes time.

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