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Market predictions and investment resolutions for 2021

Please see below for Invesco’s article on Market Predictions for the year ahead, received by us yesterday 06/01/2020:

Happy New Year! No one wants a year in review for 2020, but here is what I learned from the past year: History may not repeat itself, but it sure does rhyme. What we learned from 2020 is a repeat of the lesson we learned from the global financial crisis (GFC): Central banks are very powerful. They can’t cure viruses and they can’t create jobs, but they can boost confidence and move markets — a lot. That is the big similarity 2020 had with 2009: Central bank intervention mattered, especially by benefiting risk assets.

When I think of the New Year, I think of predictions and resolutions. And so today, I provide you with a little of both.

My New Year’s predictions

1. US-China relations may get warmer. There seem to be two factions emerging among Biden loyalists: “reformists” who want to push China aggressively on key issues and check its power, and “restorationists” who want to restore US-China relations to where they were in the Obama administration. I believe Biden will do what he typically does: land somewhere in the middle. I don’t expect US-China relations to return to what they were pre-Trump. However, I do expect the relationship between the two countries to improve and normalize. In particular, I expect more predictability and less volatility. While Biden may not unwind tariffs immediately, I do expect him to unwind the Trump administration tariffs after a “study” of their impact (which has obviously been negative for parts of the US economy, especially agriculture). The Biden administration will likely be aggressive on specific issues with China and pursue those issues multilaterally — but I expect that to occur within the context of a broader US-Sino relationship that is more cordial because the fortunes of many US businesses are tied to China. The Chinese economy is on pace to soon overtake that of the US, with the timeline expedited due to COVID, which gives China growing leverage. In fact, the Centre for Economics and Business Research recently released its forecast that China will overtake the United States by 2028 as the world’s largest economy, which is five years earlier than previously estimated due to the two countries’ very different recoveries from the pandemic.1 In addition, China has already begun to signal that it would like improved relations with the US. China’s Foreign Minister Wang Yi said in a recent interview with the South China Morning Post that both the US and China have been negatively impacted by the deterioration in their relationship over the past several years, and that US-China relations have come to a “new crossroads” with a “new window of hope” opening.2

2. Developed countries may have a better recovery than they did post-GFC. As COVID-19 vaccines are broadly distributed, I expect the economic recovery to be far more robust and inclusive than the economic recovery coming out of the global financial crisis. I believe the services industry will rebound with greater intensity, benefiting many lower income workers. That doesn’t mean that there won’t be more glitches in distribution — I fully expect there to be. And there will likely be more pandemic-related headwinds, such as the development of worse strains of the virus. However, once a substantial portion of the population is inoculated, I expect the economic recovery to be powerful. 

3. Oil may rise. Given my expectation for a strong economic recovery in 2021 as vaccines are distributed, I also expect demand for oil to increase significantly. I believe this will lead to a substantial increase in the price of West Texas Intermediate crude oil — even if we see a ramp up in oil production.

4. Bitcoin may fall. I know there is a lot of excitement over Bitcoin, but it’s starting to feel a bit like Tulipmania. Bitcoin rose more than 300% in 2020, with much of the gains made in the last few months of the year.3 I continue to believe gold is a far better choice for diversification into “hard assets” and as a hedge against geopolitical risk. Bitcoin might continue to run for a while this year, but I expect it to be volatile and to ultimately disappoint, as it has in the past after strong rallies.

5. The S&P 500 Index may have another double-digit return in 2021. With vaccine distribution beginning, a robust economic recovery anticipated in the not-too-distant future, as well as extraordinary accommodation from the Federal Reserve, I expect a continuation of the stock rally we saw in 2020, albeit with drops and pauses along the way. Better-than-expected corporate earnings should also help.

My New Year’s resolutions

1. Stay invested and well diversified. While I feel very confident about risk assets in 2021, that doesn’t mean there won’t be volatility and sell-offs in the coming year. I believe having adequate exposure to stocks, fixed income, and alternative asset classes is key to building a portfolio that may withstand volatility.

2. Look to Asia’s emerging markets. My outlook is especially bright for the emerging markets countries that have managed the pandemic well, such as China and Korea. These economies have a head start on the robust vaccine-fueled economic recovery that I expect in 2021.

3. Don’t overlook tech. While the economic rebound may result in strong performance by cyclical stocks in sectors such as energy and consumer discretionary, I don’t necessarily expect tech stocks to underperform. I continue to favor adequate exposure to the technology sector, as I believe many tech stocks may continue to benefit from trends that accelerated during the pandemic.

Although nothing is guaranteed for the future as proven by the year 2020, expert insight and opinion like this is a good way of seeing how actions and news developing worldwide could have an impact on the investment markets, and thus highlights good topics for discussion.

Please utilise blogs like these to aid your own informed opinions on what may lie ahead for the markets, but I reiterate that nothing is guaranteed for the future.   

Keep safe and well and all the best for 2021.

Kind Regards

Paul Green


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Weekly market performance update Tuesday 1 September 2020

Please see below for the latest market update from Invesco this morning:

The main focus of the week was the Jackson Hole Symposium and comments from Fed Chairman Jerome Powell on the way forward for US monetary policy (see chart of week). A “dovish”, risk asset supportive Fed remains the order of the day. Andrew Bailey, the governor of the Bank of England, also spoke at the Symposium, where he emphasised that the BoE had plenty firepower left to fight off recessions and stimulate growth. The other “highlight” of the week was the unexpected resignation of the long-standing Japanese Prime Minister, Abe, which potentially brings some shortterm uncertainty to Japanese politics, although the key reforms of the Abenomics-era are likely to be sustained by whoever emerges as his successor.

Global equities had a strong week, edging higher last week, with the MSCI ACWI hitting an all-time high on Friday. Gains were again led by the US, where the NASDAQ is now up over 30% YTD. EM also had a good week. Strength in IT-related stocks boosted Growth ahead of Value, despite strength in Financials, as bond yields moved higher. UK equities underperformed, down slightly on the week, with a stronger £ weighing on the foreign earnings-heavy FTSE 100.

Fixed income markets had a tougher week. Rising yields hurt government bond markets, which in turn negatively impacted the closely correlated IG market. Both were down slightly on the week. HY, however, managed a small gain, with global spreads and yields hitting post-crisis lows.

The dovish Fed pushed the US$ back close to its post-crisis lows, with gains strongest in £ and the Euro, with the former now having regained all its previous YTD losses and the latter at its highest since 2018. A weaker US$ provided a boost to commodities, with oil, copper and gold all making modest gains.

  • One of the highlights of last week was the speech by the Federal Reserve Chairman, Jerome Powell, at Jackson Hole, which he used to officially announce historic changes to the Fed’s approach to setting monetary policy. A shift in policy that had been widely expected given the policy framework review that Powell had initiated nearly two years ago.
  • The chart shows the 3-year monthly moving average of PCE headline inflation over the past two decades and the Fed’s target rate of 2%. It clearly shows that there has been a persistent shortfall of inflation relative to the 2% objective over the past decade. In light of this, the FOMC now “seeks to achieve inflation that averages 2% over time”. Powell emphasized that the new inflation strategy is “flexible”, with the Committee aiming to achieve this objective “over time” without defining a specific lookback period or horizon over which to achieve the average. Although the Fed has been deliberately vague as to the extent of overshoot that will be tolerated, the upshot is that the Fed is now aiming for above-target inflation.
  • At the same time with the 50-year low in unemployment (3.5% in late 2019/early 2020) failing to push inflation higher, the Fed will also now focus on “shortfalls” rather than “deviations” in employment from its maximum level, and won’t raise interest rates in response to labour market strength in the absence of clear signs that inflation is actually rising.
  • What does this mean for monetary policy? It effectively gives the Fed more leeway to run looser for longer policy. This means that the Fed Funds Rate is unlikely to be going up anytime soon. Goldman Sachs believe that it won’t be until 2025 that tightening starts. And with average inflation likely to weaken before it strengthens, there is an expectation that this will potentially open the door for further unconventional policy measures at the FOMC’s September meeting (16th).
  • And the implication for financial assets? The higher inflation outlook on its own should benefit real assets (equities, gold and other commodities) over nominal fixed income (government and corporate bonds), although easier monetary policy for longer should also underpin bonds. Finally, a more “dovish” Fed will likely put some downward pressure on the US$.

Key economic data in the week ahead:

  • A pick-up in news flow from the previous week.
  • A lot of survey data will be published. Final PMI readings for August for major economies (US, Japan, EZ and UK) will come out on Tuesday (Manufacturing) and Thursday (Services and Composite). These are expected to confirm the results from the Flash surveys a couple of weeks earlier, with the highest readings in the UK and the US, while the EZ and Japan were the laggards, with the latter still below the 50 level.
  • In the US, alongside the PMIs there are also the closely followed ISM Manufacturing (Tuesday) and Services (Thursday) surveys for August. The former is expected to see a marginally more positive reading of 54.5, but the latter is forecast to decline to a still robust 57.4. The first Friday of the month brings US Non-Farm Payrolls expected at 1.5m, slightly lower from the 1.7m in July. US unemployment is expected to show a reduction to 9.8% from 10.2% in July. The Underemployment rate, however, is forecast at 16.5% – slightly lower than last month’s 18% and perhaps a truer reflection of the current state of the US labour market. Ahead of this data, US Initial Jobless Claims on Thursday is expected to show an improvement to 950k last week from 1,006k the previous week.
  • In the UK, July’s money and credit figures are published on Tuesday and are expected to show further signs that business and household borrowing rates are moving back towards normal. Mortgage Approvals, for example, are expected to rise to 55k from 40k, but that is still well below the 60-70k range seen prior to the crisis. Likewise, Consumer Credit growth is expected to be in positive territory for the first time since April (£0.8bn). Nationwide’s House Price Index comes out on Thursday, with August expected to see a 0.5%mom increase, which would make it 2%yoy. Pent-up demand and the Stamp Duty holiday are clearly helping here.
  • Preliminary CPI for August in the EZ is released on Tuesday and expected to continue to show inflation at very weak levels, flat mom compared to July’s level of -0.4%mom. This would leave headline inflation at a mere 0.2%yoy and Core at 0.9%. Retail Sales for July are published on Thursday and, while remaining positive (1.4%mom), are expected to be somewhat weaker than in June (5.7%mom).
  • In Japan the Jobless Rate for July on Tuesday is expected to increase to 3.0% from 2.8%, so somewhat above the lows of 2.2% seen in late 2019. The closely followed Jobs-toApplicants Ratio is expected to decline further and at 1.08x would be the weakest since early 2014.
  • In China, business surveys dominate the week with both the Caixin and Official PMIs being released. Little change is expected in both sets of readings, with all remaining above the 50 level and Services continuing to be stronger than Manufacturing.
  • Australia rarely gets a mention here, but on Wednesday Q2 GDP is published, which will confirm that the economy has slipped into its first recession for a remarkable 29 years.

Invesco are market leading investment managers and so their views and insight can be valuable in providing a well informed and holistic view of the markets.

Updates like these are useful tools in keeping your views of the markets widespread and up to date.

Stay safe and well.

Kind Regards

Paul Green


Team No Comments

Invesco Investment Intelligence – weekly performance update

Please see below for Invesco’s latest Investment Intelligence Update:

News flow last week, such as Non-Farm Payrolls and the ISM surveys in the US, was generally supportive of a positive tone in financial markets. “V” looks the shape of the recovery, for now at least. The virus news, however, remains mixed. New confirmed cases continue to roll over in the US, albeit still at elevated levels, while in Europe and DM Asia case growth remains relatively low, although it has risen in recent weeks. Case growth continues at elevated levels in Latin America.  Central Bank dovishness remains very much the order of the day, with the Bank of England last week reiterating the uncertain outlook and the preparedness to do more if needed. Geo-political strains between the US and China refuse to go away, and in fact look as if they are escalating, while progress towards further US fiscal stimulus continues to frustrate.

Global equities hit their highest level since the bear market low during the week and are now back into positive territory for the year, now just 3% from their all-time high. Small caps and value/cyclical sectors led the way. In the UK further £ strength weighed on FTSE 100 relative performance, which dragged the All Share lower.

There was mixed performance in fixed income, with government bonds weaker at the margin, with the odd exception (Italy, EM). IG and HY continue to make progress. A new record low for yields for the former, while further declines in yields for the latter returned the asset class to positive territory for the year. Spreads for both still remain well above the lows seen earlier in the year.

The US$ halted its decline (see Chart of the week). Economic optimism helped boost economically sensitive commodity prices. China, the world’s biggest consumer of copper, saw record imports for the second straight month. Gold pushed to new highs as real yields declined to record lows and investor demand remained elevated.

 Market performance last week (%)

Past performance is not a guide to future returns. Sources: Datastream as at 9 August 2020. See important information for details of the indices used.1

YTD market performance and YTD low (%)

Past performance is not a guide to future returns. Sources: Datastream as at 9 August 2020. See important information for details of the indices used.1

 Chart of the week: US$ Index

Source: Datastream as at 8 August 2020.

  • One of the features of financial markets since the peak of the pandemic crisis dislocation in late March has been the weakness in the US$. In this chart we use the US$ Index (DXY) as a proxy for the currency’s performance (Fixed currency weights for DXY are Euro 57.6%, Yen 13.6%, £ 11.9%, Canadian $ 9.1%, Swedish Krona (SEK) 4.2% and Swiss Franc 3.6%).
  • At its YTD peak (late March) it had risen just under 7% on the back of its safe-haven, reserve currency characteristics and a shortage of US$ liquidity. Since then it has given up all those gains and more, declining 9.1% and now down just over 3% YTD. It is now at levels last seen in May 2018 and its 100-day decline has been the worst since November 2010. The major contributor to this weakness has been strength in the Euro (10.3%), given its high index weight, but other currencies have been stronger (SEK +18.7%, £ +11.1%). The Yen has been the weakest on a relative basis, but has still risen 4.6%.
  • Why has the US$ been so weak? A number of factors have contributed: the global rebound in growth has favoured more cyclical currencies, such as the Euro; an unwinding of safe-haven flows into the US$ on the back of this; real and nominal interest rate differentials between the US and another major markets have collapsed; aggressive Federal Reserve policy has alleviated US$ funding issues; fiscal and structural optimism in Europe on the back of agreement on the European Recovery Fund; the Federal Reserve and US government is happy to see a weaker currency; and finally, idiosyncratic US political and fiscal risk. All have weighed on a currency that on most measures was overvalued and where investor positioning was extended.
  • Can the US$ weaken further? Fundamentals are currently stacked up against the currency for now, but this is in the context where the DXY has moved from its most overbought level ever (relative to its 12m average) to its most oversold level since 1978. At the same time investor positioning (based on CFTC data) is now at a record short.
  • What does US$ weakness mean for financial markets? Historically it has benefitted global equites (and non-US stocks in particular), cyclical sectors, EM assets in general and commodity prices, such as Gold and Copper.

Key economic data in the week ahead:

A relatively quiet week ahead on the data front.

In the US there is July’s CPI reading on Wednesday. Headline inflation is expected to rise slightly to 0.7%yoy, off the pandemic lows, but still at the lowest level since 2015. Core inflation is expected to see a marginal decline to 1.1%yoy, its lowest level since 2011. The pandemic has been disinflationary. Initial jobless claims out on Thursday are forecast to show another 1.4m people receiving unemployment benefits, despite the better than expected Non-Farm Payroll data last Friday. Data on the strength of the US consumer is also out, with US retail sales for July published Friday and forecast to show a slowing recovery (1.9%mom vs 7.5%mom in June), while the preliminary reading of the University of Michigan Sentiment Index is expected to fall further and continue to hover around pandemic lows.

In the UK the most anticipated datapoint next week is the Q2 GDP release on Wednesday. If the forecasts of -20.5% prove right it would be the worst quarterly contraction of the UK economy on record. Broad-based weakness is expected, with the increase in government spending the only positive, depending on your point of view. Monthly GDP for June will also be released at the same time, which should show an underlying improving trend in the economy not seen in the quarterly numbers, with 8%mom forecast compared to May’s 1.8%mom. The latest UK unemployment report is published on Tuesday. The unemployment rate is expected to rise only slightly to 4.2% from 3.9% as the labour market continues to be underpinned by the government’s job retention scheme. The true health of the labour market will be seen away from the headline data in areas such as the number who are now economically inactive, hours worked and vacancy levels. These all point to higher levels of unemployment by year end, with the Bank of England’s Monetary Policy Report last week seeing it at 7.5%. Finally, there is July’s RICS house price data on Friday, which is expected to show a -5% drop in July, but up from -15% last month, highlighting the gradual improvement in the housing market in England and Wales.

China’s July data pipeline started last week and will continue throughout this week with figures on CPI (Monday) industrial production, fixed investment, retail sales, house price inflation and unemployment (all on Friday). Most indicators are forecast to post better readings than they did in June, suggesting that the third quarter is off to a relatively firm start.

Nothing of note during the week from either the EZ or Japan.

An insightful look into the markets by the experts at Invesco. These weekly updates are useful in terms of providing a regular overall view of the market.

Please use Invesco’s Investment Intelligence updates as well as our other blogs to refresh your view of current goings on in the global markets.

Keep safe and well.

Paul Green