Macroeconomic Themes

On a monthly basis Sasfin’s strategist provides commentary on selected themes that we consider in our investment decision-making process. This month’s international themes are as follows:

Covid-19 in 2021- vaccine roll-out: The vaccine has two roles: to fight the disease and stop transmission, but this vastness of rollout will take all of 2021 and well into 2022 to achieve.

Sustained massive US monetary support: In Q4:2020, US financial conditions were the easiest they have been in a quarter of a century, which is good for economic growth in the near term.

High and rising global debt levels: Exceptional monetary accommodation has been in place for the past 12 years using has pushed advanced economy debt levels to 432% of GDP in Q3:2020. Large deficits are expected to persist for the rest of this decade suggesting that advanced economic policy rates will need to remain low for an extended period beyond 2021 given the high and rising fiscal debt levels.

Post Brexit transition: The UK and EU agreed on a “skinny” Canadian style free trade agreement in late December 2020 which will provide British duty-free and quota-free access to its market of 450 million consumers in the EU. Key negatives, however, that the free flow of UK citizens to the EU will be hampered by work visa and immigration requirements. Also, there was the little agreement over services, which clouds the outlook for the financial services sector. The GBP/USD rate strengthened to around 1.35 on the news of the deal but looks unlikely to strengthen much further until the UK’s Covid-19 crisis abates.

China’s economic recovery: As a result of the differential growth caused by the pandemic and China’s infrastructure development and geopolitical initiatives in recent years, China is expected to overtake the United States to become the world’s largest economy in 2028, five years earlier than previously forecast.

Changes the Biden administration will bring in 2021: The Biden administration assumes duties on 20 January and will prioritise the reversal President Trump’s policies and reimpose regulatory regimes dismantled over the past four years by executive power and re-joining multilateral organisations.

Hunt for yield continues: In 2021, yields are likely to be low, but returns could be strong driven by capital rather than income gains. It will be punitive to hold cash. Policy rates will remain low in advanced economies led by the FED. The positive outlook for economic growth in 2021 is based on an increase in government spending, sustained low interest rates and the revival of sectors negatively affected by the pandemic lockdown restrictions, supporting a “risk-on” bias. The economic recovery in the US and inflation expectations are likely to steepen the US yield curve beyond five-year maturities. The Fed could respond to this by purchasing assets further along the curve, favouring risky bond sectors such as Emerging Market bonds and corporate bonds, which should get support from improving corporate earnings and narrower credit spreads.

Annual S&P500 earnings growth is expected to rebound from a fall of 23% in 2020 and rise by 38% in 2021. The strength of China’s economic recovery is pulling up commodity prices. The USD is a barometer of the global economy, typically in demand in times of stress. The USD falls when global growth is buoyant as investors tend to move away from the USD when there is a global “risk-on” bias responding to widening base of corporate earnings growth and lower price: earnings ratios.