January 2021 Monthly Outlook

Coins, Banknotes, Money, Currency, Finance, Cash

It might not feel like a New Year, as the pandemic continues to ravage most countries. On top of the human toll, the economic fallout will continue to depress activity in the first part of 2021. However, policymakers throughout the G7 provided more stimulus in late 2020 and extended many emergency facilities well into the New Year. This will help cushion the blow and help facilitate a stronger recovery later in the year.  

The two Senate seats in Georgia being contested on January 5 will shape the contours of the additional stimulus expected to be pursued by the new US administration. To be financed by a common bond, Europe's new Recovery Fund may be operational by mid-year. These fiscal efforts will be pro-cyclical in the sense of providing for stimulus as aggregate demand is already expanding, as opposed to trying to stop a contraction.  

Meanwhile, central bankers look set to look beyond the near-term clouds and toward better days ahead. Maximum monetary policy easing is at hand, barring a new negative shock. Central bank meetings will likely be more about interpreting high-frequency data, including virus and vaccine, than about fresh policy initiatives. After its strategic view, later in 2021, the ECB is expected to tweak its inflation target to be "2%" rather than "close to but below 2%."  It may also include "owner's equivalent rent" into its CPI, as the UK did recently, and the US has consistently done. The net effect will be marginally positive for its measure. That said, the market has begun pricing in rate hikes in many emerging market economies, including Brazil and Colombia, South Africa and Poland, and South Korea, Thailand, India, and China.  

Several political events stand out. The first 100 days of a US President's term often see a flurry of activity, and this time, for obvious reasons, it is doubly true. Those Senate races will determine the kind of honeymoon Biden enjoys. The UK local elections in early May include Scotland. The drive for independence draws energy from the Brexit decision, and the Scottish National Party is expected to be given a strong mandate. Germany's election in late October is noteworthy. For the first time since 2005, Germany will have a new Chancellor. The Christian Democrat Union has not yet settled on a candidate, and Merkel's first choices are not running.  A center-left government looks like the most likely outcome at this juncture.  

There had been some thought that Japan's Prime Minister Suga would call elections early next year. Elections must be held by late October, but after delivering an extra budget and enjoying popular support, some anticipated Suga would seek a proper mandate as soon as reasonable, and not simply complete Abe's term. However, he has fallen out of favor over policy (refusing to cancel the Go-To-Travel initiative proved controversial) and personal choices (apparently violating social distancing protocols).  

Canada need not have an election until October 2023, but Prime Minister Trudeau may call one next year. He leads a minority government, entering its second year, reliant on the New Democrats to pass key legislation, including the budget. Perhaps the ideal time, from a realpolitik, would be as the fiscal transfers kick-in, the vaccine rolls out, and the economy gains traction.  Maybe that would be in the middle six-months of the year.  

Investors also seem to be looking beyond the immediate news stream. The reflation trade, anticipating a post-Covid burst of economic activity, seems central to many investment plans. Businesses are cash-rich.The S&P 500 companies have roughly $2.5 trillion in cash, for example. Some will be distributed to shareholders via share buyback programs and dividends.  

It also looks like a ripe opportunity for more merger and acquisition activity after accelerating in recent months. Distressed divestitures may be part of the story from over-levered businesses or those seriously damaged by the fallout from the virus. The pandemic may also encourage companies to reevaluate core businesses and ensure supply chains are resilient, which may require redundancies or higher inventories. Interest rates are low, and equity prices are elevated, making for cheap currency for acquisitions to build scale and expand scope.

Medium-sized businesses across various industries also look poised for consolidation, and some activity was stymied by the pandemic. It is not just corporate investors. According to one industry report estimated that private equity firms have $3 trillion of "unrealized value" on their books—with carve-outs and strap-on opportunities in the pipeline. 

Tech and pharma led the megadeals in 2020, and activity will likely be strong again this year. Banking consolidation is likely a common theme in the US, Europe, and Japan. Retail and the hospitality sector, broadly conceived, are likely to have been shocked into consolidation. The rationalization of the oil sector is not complete. Media, both mainstream and social, may also be subject to consolidation. Data is an increasingly valuable resource, and there have been some juggling of corporate assets, and more are expected. 

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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