Financial/Economic Outlook for 2021
An analysis about the economic recovery for the new year
How 2020 ended…
For most of us, 2020 has been a pretty bad year, with the number of coronavirus cases spiking exponentially, to sky-high unemployment rates, to the isolation during lockdowns…
During March of 2020, global stock markets crashed swiftly due to the coronavirus and the negative economic effects it had. Many people stayed at home, economic spending was at a all-time low, with many stores and business running out of money. However, with the massive stimulus package delivered to the economy all around the globe, the stock market has become dissociated with the real economy and recovered as swiftly as it had fallen in May and June. The United States of America (USA) had one of the largest stimulus package in history, giving out US$2 trillion dollars in loans and welfare spending. This has played a part in the weakening of the USD due to oversupply of the dollar.
Currently, the value of the USD is about the same value as the USD in 2018, after the USD depreciated due to the trade war between USA and China. This has many economic implications such as imported inflation whereby goods manufactured outside of USA and sold to US citizens become more costly due to the USD depreciating, relatively cheaper US products which may boost exports to consumers outside of USA, as well as an increased risk of the USD losing its power as the dominant reserve currency and denominator of foreign exchange conversions.
As the USD become more volatile and loses its value more frequently, investors and countries might become less confident in the currency, which may lead to them considering alternatives to the dollar, including gold, Bitcoin and the Chinese Yuan.
Gold, the safe haven asset
As gold is a precious metal that is generally fixed in supply (the rate of mining of gold is less than the spike in demand for gold during heightened risks of inflation), the stability and value of gold is almost always guaranteed. Therefore, when investors expect upcoming inflation, perhaps due to the government “printing” large amounts of money to boost the economy as in what we are experiencing now, they tend to buy and hold gold as a store of wealth to hedge against possible inflation.
However, in the fall of 2020, news of the vaccine spread like wildfire, giving hope for the world that the pandemic will finally come to an end. Investors became optimistic about 2021 as the economy will likely reopen and businesses will regain growth when more people go out to spend. This has led many investors to take their money out of gold to put in riskier assets like stocks.
Bitcoin, a substitute for gold and the Dollar?
In the fall of 2020, Bitcoin’s value has increased by about 220% within 2 months, and you would have made a fortune if you bought some in the 3rd quarter of 2020 or earlier. The massive increase in supply of the USD and other currencies around the world point to the fact that the supply of money can be easily controlled by the state, and as such the value of money is rather volatile and will likely fall when the economy is doing bad and governments increase money supply. As a result, many retail investors and recently, large institutional investors, have looked to Bitcoin as a substitute for gold and the Dollar because Bitcoin’s supply is generally fixed so the value is guaranteed.
Bitcoin is also heavily marketed to be “safe”, as the cryptocurrency is based on codes that is linked by all the computers in the world. To hack and “steal” another person’s Bitcoin, you would need to hack all of the computers simultaneously and that is pretty much impossible unless you have millions of supercomputers. However, as the block-chain technology is still relatively young and in its early stages of development, many critics see the potential risks of investing in Bitcoin, even more so now that is has become more volatile which means you can earn a lot or lose a lot.
The rise of the Chinese Yuan
China has sought to push the Yuan to the international stage in recent years, starting with the Belt and Road Initiative (BRI) to loan out money to Less Developed Countries (LDCs) along the old silk road and new maritime trade route, spanning from Asia to Middle East and Eastern Europe. This is supposed to boost the local economy by building basic infrastructure like roads and bridges which will increase connectivity and trade while also spurring employment. However, sceptics have pointed out that China is actually forcing LDCs into a debt-trap where they need to repay the loans or have some sort of collateral, usually in the form of land-lease to the Chinese Government. The BRI has also encouraged the use of the Chinese Yuan in economic transactions along the trade routes.
Perhaps due to the draconian lockdowns, China has managed to contain the virus by mid-2020 and allowed their economy to reopen. While the USD was depreciating, the Chinese Yuan has remained relatively stable, a sign to investors that the Chinese economy is becoming more resilient. This is of course assuming that the statistics reported by the Chinese Government is true which may or may not be the case due to a lack of transparency. USA has also long been accusing China of under-valuing the Yuan to boost their exports. However, currently China has already become much more affluent, with a growing middle-income class wanting to purchase goods and services from overseas and this may pressure the Chinese Government to appreciate the Yuan or risk increased money outflow.
In the long-run, the rising Chinese Yuan pose a threat to the USD and may replace the USD as the reserve currency and denominator of foreign exchange conversions, as posited by Ray Dalio, co-Chief Investment Officer of Bridgewater Associates, in his book: The Changing World Order.
Looking forward to 2021…
With the huge stimulus packages and vaccine developments, the overall outlook for 2021 has become optimistic. The financial sector has seen much growth perhaps due to the large supply of money and a renewed confidence in the recovery of the economy. The real-estate sector has also expanded due to low interest-rates and increased demand for land development. Oil price has risen in November 2020 and is expected to continue rising into 2021 as demand picks up the economy starts running fully again.
Increased Work-From-Home (WFH) measures may lead to working reforms that decrease the number of hours workers actually need to be in office and may spur a movement to improve work-life balance, especially among the younger generations and millennials who prioritise work-life balance. This may or may not reduce productivity, depending on many factors like the work culture, personal discipline and whether or not high-tech software and hardware is employed to track and monitor work progress.
Assuming the vaccinations go as planned without a lot of negative side effects like deaths and allergic reactions and that no new strains of the virus will appear and cause another pandemic, it is safe to say that the economy will recover in 2021. Going long in the cyclical sectors such as Basic Materials and Consumer Cyclical should prove profitable but less for Financial Services and Real Estate as these two sectors have already seen a large growth. However, it is worth noting that diversification is just as important, especially hedging against possible inflation because when the economy fully reopen, consumers are going to spend the large amount of money in the economy which will boost money velocity.
