By Peter Lundgreen, Founding CEO of Lundgreen’s Capital
Teaser: Investors were still in the mood to buy all kinds of securities towards the end of 2020 and it seems to continue into January.
The largest number of Christmas gifts that I received this season were, as usual, the electronic kind- in the form of large analyses from international banks and other financial companies around the world. Of course, all the analyses cover the prospects for the financial markets in 2021, and rarely have I experienced such a united optimism about how a new year will be a fantastic year for the global economy, as well as for investors.
The mutual expectations ascribe to that the global economy will continue to be burdened by the Covid-19 pandemic in the first quarter, but the turnaround will come when the control of the pandemic is obtained. Inflation will remain low, and loose fiscal policy combined with quantitative monetary policy will be the key to optimism during 2021.
The implications in the financial markets can now be answered by all investors, regardless of what time of day you ask. The answer is, continued low interest rates in major bond markets, which in turn increases demand for credit bonds and stocks.
These prospects have long been priced in the markets, therefore I am very attentive towards whether investors just buy securities because others buy. This means that basics, like valuations of companies and credit bonds are being ignored, and the market is moving higher because investors are buying securities in speed blindness. The consequence of such a development is well known to investors since the Dutch market for tulip bulbs collapsed in February 1637.
My primary scenario for 2021 is not that the gains on all types of securities will develop into a bubble, it is not a prediction of a bubble bursting in 2021, but I believe that in 2021, it will be incredibly healthy to assess why financial markets stay bid, if that happens.
I have also understood the rationale in the markets, which states that the many financial aid packages will begin to work, combined with a return to a normal everyday life, where there is a delayed consumption need in households. This, combined with a financial market that continues to be flooded with infinite amounts of liquidity, will result in a buy signal after another.
This strong belief can be found all-over the world, including among German corporations. The business confidence in December (graphic one) continued to rise, instead of turning downwards as expected. Again, the companies are looking beyond the Covid-19 crisis, with focus on the brighter times, in about six months.
In the financial market, we all lean towards this same story, though during these situations, my concern increases, and I become alert. But the trend is currently very firm in all markets, and it is not now that one should try to bet on a 10 pct. downward correction in the stock market.
It is my assessment that the driving force behind the increasing prices on securities is the enormous amount of liquidity that exists in the financial system, meaning it is no longer a positive macroeconomic story that provides the bull market feeling. Therefore, the continued purchase can stop abruptly, if the bullish market is solely based on access to ample liquidity.
My belief is that the biggest uncertainty many investors are trying to measure is how fast Covid-19 vaccinations are progressing. I estimate that many investors believed in a faster vaccination process in the western countries, with the vaccinations being finalised around the end of the first quarter, but now it more realistically, at the end of the second quarter.
However, this delay can be offset by the fact that more vaccines are being approved, which again increases the supply of vaccines. My conclusion is currently that the development in the pandemic, and vaccinations, is roughly within the range that is priced in the financial markets, but the new mutations of the virus can change the outlook quite quickly.
The Western world, in particular, is facing a first quarter with headwinds. One of many examples will be the German factory orders (graphic two), which, highly likely, will start pointing downwards again, and during the first quarter, I still expect many bankruptcies among smaller companies in Europe. These are some of the reasons why I expect quite high volatility in 2021, but despite this outlook, I still have a balanced view of the new year.
This is primarily because new or intensified investment flows will also emerge in the new year. The Far East has the Covid-19 crisis significantly under control, I expect China will stimulate private consumption and the clarification about the Brexit gives a different view of the United Kingdom as an investment destination. There are definitely good stories for investors in 2021, but currently it will be best if everyone stays optimistic.