Some of the Big Questions for 2021 – Summary

Why is housing booming in a global recession?

Housing did not lead the slowdown but it is leading the recovery, helped by a sharp fall in interest rates, historical levels of fiscal income support, and specific pandemic-related demand drivers. We estimate that annualized residential investment in H2-20 will be 7½ pp higher in the US, Korea, Norway and Canada as a result of the interest-rate decline.

Inflation – Is this time different?

We show there is no historical basis for assuming higher fiscal deficits or money growth (two features of this crisis) lead to higher inflation, and also see almost no evidence of supply shocks or increasing home production driving up inflation. With a current global output gap of 4% it will take years for underlying inflation to recover.

How quickly will the global labour market recover?

Adjusting for various forms of inactivity, it appears Developed Markets has reabsorbed roughly half of the labour shed due to COVID-19. Shadow unemployment rates show that both the deterioration and the recovery are much more rapid than suggested by headline unemployment measures in many countries.

How long can the Value trade run?

Value has been driven by four related factors: cross-market risk premia, commodity prices, the dollar, and inflation expectations. Of these, inflation has become most important. Valuations have also shifted.

The path to vaccine success: How it may play out in the US: Herd immunity may be too high a bar.

Economic activity can recover when risks to the vulnerable parts of the population fall. Pharmaceutical companies may produce enough doses by end-2021 to vaccinate one billion individuals. The majority of the doses may be headed to the US. 50% of the US population may be 'protected' by July '21 (steep fall in new cases), rising to 80% by end '21.

Is the EM rally just getting started?

There is scope for positioning to drive EM gains further into early 2021. But with credit and FX options risk premia quickly declining, market gains may be front-loaded, particularly in FX. China and the US's liquidity may turn less supportive from Q2 onwards. EM-DM growth gaps and EM macro balance sheets are likely to land at much weaker levels than in the past.

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