Global X 2021 Outlook

In 2020, annual outlooks quickly became obsolete as the COVID-19 pandemic caught the world by surprise. Nearly a year later, we believe massive stimulus efforts, vaccine development, and distribution, and new political agendas put us on a likely more predictable path to recovery. Yet if 2020 taught us anything, it’s to never underestimate the unpredictable. In this 2021 outlook, Global X’s CIO and Research teams provide our insights and expectations for the year ahead, covering topics from the macroeconomic landscape, to disruption amid a return to normalcy, interest rates, and income investing, and investing abroad.

Trends to look out for in 2021

  • Growth may lead in the broader cycle, though Value may stand to benefit from the reopening of the economy and may have a strong year
  • Small caps could shine should a strong U.S. economic recovery take hold
  • ESG allies in the White House could accelerate demands for greater action against climate change, and more widespread support for ESG and sustainably-themed investing
  • Biden’s policies may align with many disruptive themes that COVID-19 accelerated, providing longevity to these theme’s recent rallies
  • Fixed income may remain a challenge amid a low rate environment, promoting greater interest in alternative income asset classes like preferreds and EM debt, or income strategies like covered calls
  • The dollar may continue to weaken, causing investors to increase allocations to cheaper, and in some cases faster-growing foreign markets.

A Recovery at Risk

The events of 2020 can’t be understated: they were staggering. The global economy essentially shut down, resulting in a depression-like drop in GDP. In the U.S., GDP contracted at an annualized rate of 5% in Q1 and a shocking 31.4% in Q2, before a massive 33.1% swing higher in Q3.1

As a long 2020 comes to a close, a clear pullback in economic activity is evident in the US and many European countries with COVID-19 cases rising again. The deceleration in job growth is likely related to rising COVID-19 cases as much of the country heads inside for the winter. Many people are falling behind, without much to help them bridge the gap. According to as recent Census Bureau survey, nearly 9 million renters said they were behind on rent and basic utilities. Additional fiscal stimulus programs could potentially provide a booster shot to the economy.

Both the International Monetary Fund (IMF) and the G-20 warn that the global recovery is potentially at risk of derailing despite upbeat vaccine news driving equity markets to new all-time highs. While the market is focused 3–6 months out when greater vaccine availability is likely, the economy looks languished and in much need of a jolt. Currently, global growth is expected to have contracted -4.1% in 2020, followed by a 4.9% rebound in 2021.2 However, uncertainty in these forecasts is high.

We must recognize that despite the general optimism surrounding 2021, the global economy is still weak and a return to pre-pandemic GDP levels will take years. But the initial vaccinations are already under way and we expect widespread distribution by Q2. Provided effective distribution occurs, it is reasonable to expect the economy to fully reopen by 2H 2020. In addition, if monetary and fiscal stimulus remain robust to support consumers and small business through potentially a few more quarters of closures, the economy will be in a much better position upon re-opening. Finally, in 2021, we expect the Biden Administration to implement new approaches and ideas, ones that could propel certain themes, including infrastructure development, climate mitigation, and cannabis deregulation, as well as potentially reinvigorate domestic and international economic activity.

The Support the Economy Needs

The U.S.’ uneven response to the COVID-19 crisis outlasted the relief that the $2 Trillion CARES Act provided. As a result, the economy needs another booster shot to buy it time while the vaccine gradually makes its way through the country. The start of Joe Biden’s presidency could provide a fresh voice to stimulus negotiations and federally-funded programs that pump up the demand side of the economy and promote structural change. But aside from a slimmed-down stimulus package, we don’t expect much more from what will likely be a split government in 2021, pending the results of the Senate run-off election in Georgia.

Undershooting fiscal stimulus is a key risk. For the U.S. to recover, more needs to be done to protect the lifeblood of the economy: the individual consumer and the small business.

The Consumer

As a consumption-driven economy, the U.S. depends on the mass consumer to sustain economic growth. But middle- to low-income consumers remain particularly vulnerable to COVID-10, both physically and financially. Reinstating federal unemployment insurance and some form of rental assistance is critical for this group to make it through to mass distribution of the vaccine and a wide economic reopening.

CARES Act checks helped in the short term, but wages for the middle class have been stagnant for decades. Pre-pandemic, real average wages had about the same purchasing power they did 40 years ago, and any wage gains skewed toward the highest-paid workers. People can only hold out for so long, and many people are burning through what savings they did have. And most American don’t own stocks, meaning the wealth inequality gap widened significantly this year as markets rallied. Fed data from 2016 show that only about 14% of families are directly invested in the markets. Roughly 52% have some market participation, but mostly through 401(k) plans.3

A lingering question for the economy is how consumers who can spend will spend when fully reopened. Typical spending on restaurants, vacations, and live entertainment haven’t been options for many people this year. This type of spending doesn’t accumulate as pent-up demand, though. We don’t expect many consumers to double-up on eating out, leisure travels, or concerts in 2021. An initial surge when the economy gets fully turned on is likely, but consumer fundamentals continue to deteriorate.

The Small Business

Adaptation was key in 2020. For companies to survive, they needed to change their business models on the fly. Becoming digital-first, through online ordering and payments was a wise and necessary move that helped many businesses thrive. But for most small businesses, particularly those in the service industry, pivoting wasn’t an easy option. These businesses need help, and many haven’t received enough, creating fundamental weakness throughout the economy.

Small businesses drive the U.S. economy, as they employ about 47.3% of all private employees.4 The CARES Act initially provided $350 billion for its Paycheck Protection Program (PPP), all funds of which were claimed by April. Congress subsequently added another $310 billion to the program. June’s PPP Flexibility Act also gave businesses more options on how they could allocate loans. But as the pandemic re-intensifies and with new regional lockdowns in effect during the all-important holiday season, small businesses are closing and filing for bankruptcy at an increased pace as large portions of the economy remained closed and stimulus programs expire.5

A Fed-supported Market

At the start of the pandemic, the government’s plan essentially involved spending the U.S. out of this crisis. And in some ways it worked—for a little while anyway. The CARES Act kept consumers afloat and the Fed backstopped risk assets with whatever-it-takes support. Importantly, the Fed supported corporate debt, which reduced default risks and restored normal market functions following the deterioration in financial conditions resulting from the lockdowns. The Fed also cut benchmark interest rates to near zero, reducing borrowing costs for business. We expect the Fed to remain supportive for some time, with current Federal Open Market Committee (FOMC) projections showing rates remaining at this level through at least 2023.

For markets, the old adage rang true: Don’t bet against the Fed. With their wheels greased, markets skyrocketed to new highs in 2020 and investors saw their wealth increase significantly. The latest flow of funds data from the Fed suggests that the household sector increased wealth by $3.8tn between Q2 and Q3.6 The massive stimulus package shifted control of risk assets from the public domain to individuals. Low interest rates and inflation encouraged investors to purchase risk assets because— they weren’t so risky.

U.S. Equities in 2021

Adequate vaccine distribution and stimulus could lead to a robust recovery in the second half of 2021, drive corporate profits closer to 2019 levels, and generate strong equity returns. Value and small cap stocks have a good chance to outperform in the short term should a comprehensive reopening commence, particularly in the early stages. Some of the most loved sectors of the economy including Information Technology and Consumer Discretionary may take a breather with Value stocks supported by positive vaccine news, but their secular trends will continue. Micro shifts in leadership from Growth to Value since September are evident. However, a more robust shift requires bringing the virus under control and a booster shot in the form of additional fiscal stimulus.

The big question in the short term is what a Biden presidency can accomplish if the Republicans keep the Senate. However, we expect Biden to make full use of the executive powers at his disposal, which could become stimulus-like and be supportive of equities. We expect his administration’s policies to align with many of the disruptive themes that COVID-19 brought to light (discussed more in Investing in Disruption).

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Disclosure: The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate ...

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