01st Quarter 2021: Market Outlook

The following is my brief assessment of the economic outlook for the year 2021, and how this affects your investment with us.  I normally send this out on the first week of January.  However, this year, due to a fractious handover of power in the United States, and the rollout of the COVID-19 vaccines, I have delayed it so that we have a better grasp of developments this year. 

The American economy is expected to rapidly recover, and the labour market is expected to pick up.  This is due to the rapid rollout of the vaccine by a competent administration, and the positive effect of the recent barrage of executive orders to fix major policy missteps by the Trump administration.  This will lift the market.  Trade barriers are also expected to be rolled back, which will stimulate further growth.  According to the Congressional Budget Office, the US gross domestic product is expected to return to its pre-pandemic size by mid-2021, and unemployment is forecast to rebound to its pre-pandemic level in 2022.  What is significant is that the CBO projections do not assume the effects of the Biden administration’s US$1.9 trillion stimulus plan.  The Republican Party has shown a reluctance to sanction the size of the Biden stimulus package.  However, with the Democrats in control of both Houses, they are not in a position to actually stop the Biden legislative agenda, or even filibuster appointments. 

In summary, we are looking at real GDP growth of 3.7% in 2021, GDP growth to average 2.6% over the next five years, the unemployment rate to fall to 5.3% in 2021, and further to 4% between 2024 and 2025.  Inflation is expected to rise to 2% after 2023, which means that the Federal Reserve may start hiking rates in mid-2024.  What we are seeing with GameStop and other issues with short sellers should be viewed as an opportunity.  Hedge funds, and their investors, burned by the short selling fallout, have had to liquidate their positions elsewhere, bringing down the market.  However, this is not an indication of any inadequacy of these holdings.  Share values have dropped due to massive liquidation of shares, not because there is anything wrong with these companies.  This affords an opportunity for others to pick them up below market valuation. 

Most of my client holdings are in East Asia, with an average annual growth of around 40% to 60% over the past year, despite the difficult market conditions.  As such, I remain bullish on Asia over an extended investment horizon.  The following data is from various reports from fund houses, and the World Bank.  After a sharp slowdown to 0.9 percent in 2020, output in East Asia and the Pacific is projected to expand 7.4% in 2021.  However, that is still around 3% below pre-pandemic projections.  We are looking at a wider K-recovery across the region, with some countries lacking behind others.  China is expected to recover strongly, but the GDP output in the rest of the region is still projected to remain around 7.5% below pre-pandemic projections in 2022. 

The key downside risk is the possibility of renewed outbreaks and delayed rollout of a vaccine, heightened financial stress amplified by elevated debt levels, and increased political instability in some countries, such as Malaysia.  There will be persistent policy uncertainty, particularly in nations with petro-bonds due, with a danger of a cascading default.  That aside, there are near term risks, and do not affect investments over an extended horizon.  In summary, China is expected to rebound earlier.  China weathered the trade war with the US well, with the trade deficit widening due to her manufacturing capacity.  China has kept new infection rates down, and resumed production.  Her GDP is expected to grow between 2% to 4%, which is below her potential, with major upsides. 

GDP in the region, excluding China, contracted by 4.3%, and growth in about two-thirds of the regional economies declining by more than 7% below their long-term average.  Activity has since been supported by a quick and sustained resumption of production and exports, with additional boosts from stimulus-fuelled public investment.  Aside from China, Vietnam, Indonesia, and Singapore are expected to do well.  There is uncertainty in Malaysia, Myanmar and Thailand due to domestic political risk.  South Korea and Japan will recover, but slower.  Restrictions on economic activity to stem the pandemic have largely eased across the region, and goods exports have started to recover.  While we are looking at elevated infection rates across much of maritime Southeast Asia, Thailand and Myanmar, the rollout of the vaccine will largely mitigate this eventually.  Due to their young demographic, economic growth will recover. 

Regional growth is still projected to accelerate to 7.4% in 2021, led by a strong rebound in China.  While the recovery is expected to be more protracted, following last year’s contraction, output in the region excluding China is expected to expand by 4.9% in 2021, and 5.2% in 2022, to a level around 7.5% below pre-pandemic projections, with significant cross-country variations.  In summary, funds focused on East Asia, Greater China, and Southeast Asia, all excluding Japan, will still grow.  Much of that growth is stimulated by factors largely divorced from realities on the ground.  Whilst consumer habits have moved from normal retail, online retail is still expected to do well.  Technology funds have tremendous potential, and will drive growth in the portfolio for the year, followed by healthcare, as long as there is a demand for PPE and vaccines.