I commented in a member only blog post last week that I was little taken aback by the apparent optimism of Morningstar research professionals who presented a view of the US economy’s prospects for 2021. In fairness, they used plenty of supporting data, although of course, no-one has future data! Analysts will be using trend patterns and other statistical methods as well as economic and market theory to extrapolate the future.
Here are some extracts from their QI Market Outlook documents that I thought might be of interest. You may raise an eyebrow at one of two predictions!
- US GDP will rebound by 4.7% in 2021.
- Vaccine distribution (in the USA) will roll out in the first half of 2021 and be widely distributed by the third quarter.
- Interest rates (again USA) will stay lower for longer with federal funds rates at 0% until 2024, but longer term rates may drift up this year – a relevant point for fixed income funds with long duration.
- The huge amounts of corporate debt issued in the USA will slow down as the pandemic ends.
Morningstar’s market valuation standard has the US Equity market 8% over-value, driven by the mega-caps like Apple and Tesla. Tesla and Netflix are unsurprisingly reported to be hugely over-valued (around 150%). Value shares are on the other hand looking to be under-priced, especially at the smaller cap end of the market.
It is anticipated that 2021 will set new records in private equity fund raising.
SPACs (see my separate comments on these funding vehicles in the Watching Brief for January) have raised a large amount of capital which can be geared up to fund plenty of acquisitions (at high prices?).
Oil and energy stocks are the most ‘still’ sold off with the sector down more than 20% over 2020. The analysts expect the global glut of oil to get soaked up and the sector (in the USA) to recover.
All the above suggests a ‘back to normal’ US stock market with reasons to buy into oil and energy companies. That is something you may have noticed in the top 10 holdings of UK recovery and opportunity funds.
The pessimists’ camp – much reported in the UK news media that I see – takes the view that there are many red flags and other behavioural indicators that a market meltdown is more than likely, so making subtle calls on asset classes, stock sectors and so in is a bit irrelevant. This point of view ‘feels’ right to me, but that may be a result of my UK (and thus Brexit influenced) point of view.
Personally, I am 60% or more in the pessimists camp, but less so than I was 6 months ago. I suggest that no-one can know for sure what will happen in 2021 so a carefully balanced mix of good value assets, with diversification across the main classes and prudent use of cash reserves remains appropriate in the near term. If the optimists are right, there will be time to get more money to work in the right assets later in the year.
One theme that is rather more relevant to European than US stocks is ESG. The sustainability theme will be the most important for some years now, in my judgement. So if you want to buy funds, look for value, small cap and sustainability! Europe may well be a better place to start than North America or Asia Pacific. Not quite a needle in a haystack, but a challenge.
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