As the disastrous year 2020 concludes with the promise of mass vaccinations, hopes are high the pandemic is on the way out along with its related lockdowns. And, as a result, there is a lot of optimism for 2021 on markets, especially for oil. The latter plummeted into negative territory during the peak of the pandemic, but has now breached the $50 per barrel level on the news of successful COVID-19 vaccine trials.
The coming year, however, still bears a lot of risks and investor optimism itself is one of them, financial analysts from investment companies interviewed by the Financial Times believed.
According to them, market players have put a lot of their hopes on the effectiveness of vaccinations and their effect on the economy, but appear to neglect the fact that it might not be as easy as they believe, Vincent Mortier, Deputy CIO at the investment company Amundi, indicated. Analysts questioned by FT indicated that markets are currently heavily supported by their respective governments and suggest that should this support wane for some reason – the stocks and instruments that have been growing of late might enter the red.
Inflation is another point of concern for investors, according to the experts asked by FT. They indicated that should the current trend for low inflation shift the other way, it would be a "game-changer" that could lift up those industries that have so far underperformed, such as banks and financial institutions. One of the analysts pointed out that most investors have grown accustomed to the low inflation and tailored their portfolios accordingly, and should the trend change their strategies might suddenly become ineffective.
However, growing inflation might, in turn, trigger another source of risk for investors – a regulatory response in the form of rising interest rates, the financial analysts stressed. Should inflation grow, central banks might start increasing rates, thus tanking stocks' growth.
At the same time, Howard Marks, Co-Chairman at Oaktree Capital Management, suggested such a scenario is unlikely "in the intermediate term" since there are little signs of growing inflation at the moment. Another analyst, senior portfolio manager at PGIM Fixed Income, Gregory Peters, partially agreed with Marks, suggesting that only temporary inflation growth might take place in 2021 and that it will later come back to previous levels. Peters noted though that investors hope the temporary correction in inflation levels next year will not trigger a response by the Federal Reserve in the form of rate increases.
The last risk named by the FT's experts was the dollar's recent drop in value. One of the analysts noted that should the greenback's bearish trend continue the Fed would lose flexibility since its negative interest rates will stop working. This, in turn, might lead to "an equity sell-off", the financial analyst warned.
Despite naming a number of risks that markets will face in 2021, the investors' overall prognosis is one of "cautious optimism", meaning economies are likely to grow further, but that they're still not exempt from possible failures.