- Potential for the economic recovery to be more positive than expected
- Consumers likely to power economic activity when lockdowns ease
- Small-caps and companies with a domestic focus may benefit most from restart of the economy
- Return to ‘normal’ will introduce some surprises
- Markets currently pricing for a seamless roll-out of the vaccine
- The US Senate is now balanced. Biden may be more free to spend
After what has been an eventful and volatile year for the US market, we see the opportunities for 2021 shaping up in different ways.
Potential for positive surprises in the economy
We think that there is scope for the pace of economic growth to surprise on the upside. More stimulus is on its way. Savings are high and provide some cushion for consumer spending, even if tougher times are still ahead.
Then there are inventories. Typically, there is a surplus during a recession. But this recession, while very sharp, has been short-lived. The need to build up inventories will therefore bring a healthy dynamic to demand/supply as the recovery takes hold.
On the unemployment front, joblessness is already lower than anticipated. We clearly need to distinguish here between the types of jobs, however. We are cognisant that some jobs might have been lost forever as the crisis has accelerated some trends. For example, some retailers won’t survive. In other areas, such as hospitality, it may be a long time before the sector returns to pre-crisis levels. On the other hand, in more robust sectors such as technology and healthcare we expect numbers to pick up quickly and strongly.
Evidence of pent-up demand
Secondly, we are going to keep a close watch on consumers’ behaviour. It will be interesting to see, post-crisis, how quickly people will return to old habits. Shopping. Dining out. Travelling. Meeting in person.
There is no doubt that some trends have been accelerated by the lockdowns and staying at home. If e-commerce’s growth is estimated to have jumped ahead by two years, what will be the residual effect on the behaviour of consumers? Some consumers that didn’t shop online previously have come to realise the convenience and won’t change habits again. We have also seen people spending a lot more on their homes and physical goods rather than travelling or experiences. The pace at which some of these behaviours change back to pre-pandemic (or not) will be important and might provide some investment opportunities. On travelling, for example, people are likely to seek holidays after this period of stay-at-home.
Back to what kind of ‘normal’?
On the business front, some habits might have changed permanently – the lower cost and convenience of video calls, for example. The increase in working from home will also have an impact on requirements for office space.
All of these will clearly be linked to the availability and uptake of vaccines. At the moment, there seems to be a rather optimistic scenario on the vaccination process, its adoption and efficacy. Any further delays in the re-opening of economies and the reduction of social distancing measures will create some volatility in markets.
A new administration – but checked and balanced?
Thirdly, we have had a change in government. The new administration has a different agenda to the previous one. A now balanced Senate may enhance their ability to pass policies which are less market-friendly. Corporate taxes and regulations may rise.
Where the new administration could make a difference is in green energy. This is an area where we could see some opportunities. We are anticipating the tensions with China will remain but be dealt with in a different manner than by the previous administration.
Smaller companies may benefit most
As we are positive on the prospect for an economic recovery, small and mid-cap companies that have a more domestic tilt should benefit even more from the pick-up in economic activity. Having lagged behind in terms of performance versus large caps, small caps trade at valuations that are attractive versus large cap peers. We feel that this area of the market is to be considered in 2021.