2021: A calm after the storm?

Until an effective vaccine for COVID-19 is in wide circulation, renewed virus outbreaks and further lockdowns remain an ongoing risk. Recent efficacy data from the Pfizer and BioNTech vaccine has been a positive surprise for markets. If and when a highly effective vaccine becomes widely available, it is likely that COVID-19 will stop posing a major risk to healthcare systems and the global economy. Our base case foresees wide-scale availability of such a vaccine in 2Q21. This means social activity could fully normalize by 3Q21, and developed economies could recover to pre-pandemic GDP levels by 2022. But in the meantime, ongoing outbreaks in Europe and the US, and potential further outbreaks elsewhere, still need to be managed by other means such as restrictions on economic activity. In our view, this means that investors should start positioning for the upside in a post-pandemic world, but remain cognizant of the near-term risks that may warrant some hedging.

Fiscal and monetary policy will remain a key driver for financial markets in 2021. In our base case, continued monetary and fiscal support should allow growth to recover throughout the year, with inflation increasing moderately and real interest rates staying negative. In the likely case that President-elect Joe Biden has to work with a Republican majority in the Senate, the ability to pass the full Democratic fiscal plan seems limited. However, we still expect a sizable package of around USD 500bn to USD 1tr, or 2.5–5% of GDP, to support economic growth. Similarly, the latest accommodative policy actions by the Bank of England (more asset-buying) and the Bank of Australia (lower policy rates), and the outlook for more quantitative easing by the European Central Bank, reaffirm our base-case view of open-ended monetary accommodation for the time being.

In our downside scenario, fiscal spending may prove less effective than expected, and inflation could increase more meaningfully while growth remains sluggish.

One major political event of 2020 is likely to have major ripple effects throughout 2021: the US presidential election. While Joe Biden will most likely be the 46th US president, three questions remain:

1. What will a Biden presidency mean for US foreign policy?

A Biden presidency will likely lessen the uncertainty around US external policy. The approach and tone of the president-elect will likely be more collaborative and targeted, and, most important for markets, less volatile than President Donald Trump’s. In general, the former vice president seems to favor a multilateral approach to foreign relations over a unilateral one. Furthermore, the new administration might be more reluctant to use tariffs as a trade policy tool. As a result, CIO expects no significant increase in US-China-Europe tensions in the near future. That being said, it is important to stress that a significant shift on trade policy with the new administration is unlikely, and US-China relations remain a long-term issue in our view.

2. Can the election be successfully contested by President Trump?

Some votes will be recounted and President Trump has not yet publicly conceded, but we think the extent of President-elect Biden’s lead in the reported results leaves little doubt about the ultimate outcome of the presidential race.

3. Is there a chance Democrats take control of the US Senate?

With neither the Republican nor Democratic candidates achieving 50% of the votes in the two Senate races in the state of Georgia, the seats will be decided by a runoff election in January. We think it is most likely that Republicans will control the Senate with a one- or two-vote majority However, equity markets could begin to react if the race gets closer in the coming weeks, which could lead to higher bond yields, relative underperformance for secular growth names relative to cyclicals, and outperformance for greentech stocks relative to traditional energy names.