Despite the current raging pandemic and Congress debating whether to impeach the same president twice, the portfolio managers that BNPP Asset Management’s new CEO, Johanna Lasker, assembled to talk to the press on Wednesday morning said they believe all of that will fade away gradually. They provided a rosy outlook for equity markets, exchange rates, and the U.S. economy over the next year. They said a strong consensus had formed among them that by the end of 2021 the major economies will have been vaccinated against the effects of the pandemic provided, of course, that the global vaccine program rolls out as well as is hoped.
It was very comforting.
Expecting a measure of compatibility between Biden and the new Congress, BNPP’s portfolio managers see political conflict receding in 2021, at least with regard to legislation and government affairs. They forecasted, and frankly welcomed, more economic stimulus, which they see as likely in the short run. They also said that if there is a need for more economic stimulus, the Democrats are likely to provide it expeditiously.
The managers addressed the popular concern that the stock markets have divorced themselves from economic reality ever since they started recovering last spring. The present recession is different because it came about directly from government actions in response to the pandemic rather than failures in the economy or institutions. The stimulus payments were very effective with regard to supporting, among other things, personal income, which rose over the course of last year. Corporate revenue fell but not nearly as much as GDP declined and not as much as during the 2007-08 recession.
Public debt obviously has grown in the major economies and working it down will concern governments for a while, although probably not this year as they focus on recovery. Much of the new debt is held by the central banks, creating a medium- to long term problem.
The outlook in Europe is not quite so positive because of political pressures there across the European Union, especially on the countries bound together in using the euro. Additional government stimulus in Europe would be more controversial and less likely to occur.
The Asian emerging markets, including China, should benefit somewhat from what BNPP expects to be a reduction in tensions between the U.S. and China. The relationship should increasingly resemble economic competition rather than geo-political conflict. Since the onset of the Trump tariffs, and especially since the pandemic began, China has increased its intra-Asian trading. Trading among other Asian countries has also shown healthy growth that is likely to continue. For emerging markets stock pickers, the Asian markets will offer opportunities because of the diversity of industries and company structures across the region.
Prices in the U.S. stock markets should continue upward over the next year. Because of the recession, not to mention the pandemic itself, the stock market has been trading at high price-to-earnings ratios. Since the recession was not caused by economic disequilibrium, there were no problems that the economy had to work through. So the stock market has focused on future earnings, net corporate revenues when the economy gets back on its feet. This year, as the economy is restored to health, the focus will be on corporate earnings. The increase in earnings will pressure downward many of the current market’s high price-to-earning multiples but stock prices will still trend higher.
On the political front for U.S. companies’ point of view, the outlook is for quiet. A corporate income tax increase is not in the cards for 2021, while more economic stimulus – if needed – is a possibility. Speaking of stimulus, it could take the form of a federal infrastructure program, which would not only be good for employment but would also boost materials and tech companies.
What about ESG – environmental, social and governance issues in the marketplace? The environmental prong seems broadly accepted, and adoption of green technologies and systems is advancing. Companies involved in sustainably delivering products and renewable energies are likely to be good market performers. The economy is undergoing a massive shift in electricity production as well as use (think automobiles). Inclusion will continue to be pursued as a goal.
Foreign exchange markets are supposedly expecting the U.S. dollar, which has fallen considerably since the start of the pandemic, to continue to slide. “The trend is not your friend,” according to the FX manager, because the U.S. dollar has fallen enough. The European Central Bank or the Bank of Japan would have to raise their interest rates to pressure the dollar downward from current levels, and that is not at all likely to happen this year.