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Economic outlook

With the passing of an unprecedented 2020, we have collected the thoughts of prominent commentators to provide you with insights as to what they believe may lie ahead in 2021.

Emerging Markets:

Growth across emerging market (EM) economies fell less than in advanced economies at the peak of the Covid-19 pandemic; according to the Institute for International Finance's (IIF) EM growth tracker growth fell to -2.4% per annum in May 2020. Recovery in EM has been relatively robust, with the region returning to growth in July 2020 and registering growth of over 5% per annum in August 2020, the latest data point available. The largest contractions in economic activity were recorded in the EMEA region, whereas Asia (led by China) experienced the smallest fall in the growth rate in economic activity.

Non-resident capital flows (both equity flows and debt flows) have recovered since the massive sell-off in March 2020. In late March, non-residents were withdrawing equities from EM at a rate of around US$2 billion each day and debt securities at a rate of around US$800 million each day. Investment sentiment shifted significantly as central banks began fulfilling the demand to hold safer, more liquid securities, paving the way for a recovery for non-resident flows into EM. Broadly, the countries that were more successful in controlling Covid-19 have benefited from stronger, quicker recoveries in non-resident flows. Flows into China and South Korea have been strong.

Turning to China (which is essentially one quarter ahead in the recovery compared to the US) growth has started to return to trend, of around 5-6% per annum. Our Chinese Economic Activity Index showed growth of 1.2% year-on-year in September 2020 and is on a clearly rising trajectory towards trend growth.

Money and credit growth (led by commercial bank lending) has increased only slightly in 2020, from around 8.5% per annum to 10.5% per annum in September 2020. Reflecting this, China will not experience a cyclical credit-driven boom akin to 2016-17, but will rather slowly return to trend growth, most likely in 2021 H2.

Throughout 2020, EM currencies have weakened to varying degrees, with the average in relation to the US dollar down around 10%. This is another case of the "dash-for-cash" as investors sold risky EM assets in favour of safer, liquid assets. The Fed responded appropriately by flooding the market with US dollars, increasing the US broad money supply by over US$3 trillion since March 2020 and providing US$ swaps to 14 central banks. As the US dollar weakens, EM currencies will tend to strengthen over the medium-term (with a few exceptions such as the Turkish lira and the Argentinian peso, where money and credit growth is once again excessively high).

The 2021 outlook for EM economies is therefore relatively optimistic, based on a weaker US dollar and progress being made towards a Covid-19 vaccine.

- John Greenwood,
Chief Economist,

- Adam Burton,
Senior Economist,


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. Their (anticipated) lack of majority in the Senate will impair their ability to pass policies which are less market-friendly. The market is currently pricing a split Senate/House, limiting the Democrats to implement reforms. If the Democrats were to win the majority in the Senate, this would change the dynamic as they have an agenda of increased corporate taxes and regulations.

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.

- Cormac Weldon,
US equity strategy,


Europe's economy recovered strongly over the summer after being severely affected by Covid-19 in the spring. However, a second wave followed in the autumn.

Azad Zangana, Senior European Economist, has upgraded his 2020 GDP forecast for the eurozone to -7.1% from -7.8% for 2020. For 2021, he forecasts growth of 5.2%, which he calls "a solid recovery".

Forthcoming stimulus should help to support eurozone economic growth through 2021 and beyond.

"Poland and Hungary are currently holding up progress on the EU recovery fund, but we expect disbursement in the second half of 2021, leading to increased investment activity in 2022," Zangana said.

For anyone considering an investment in European equities, now could be the time to take stock of how the region has changed. Far from being dominated by financials, as was the case ten years ago, Europe now offers more balanced exposures.

Lockdowns in the spring, and again in the autumn, restricted the ability of eurozone businesses to operate as usual. However, European companies have weathered the difficult 2020 well and are generally in good shape.

Fund manager Martin Skanberg said:

"Corporate earnings for the third quarter of 2020 (the latest available) were very strong. We estimate Europe had the highest proportion of earnings beats in ten years. This shows that the pent-up demand was there after the first phase of the virus.

"It also demonstrates how companies have been able to control costs, albeit partly through measures such as lack of corporate travel. This should stand them in good stead as the virus impact fades and sets up European companies for a solid earnings recovery in 2021."

- Emma Stevenson,
Equities Correspondent,


For the economic outlook, three things matter: (1) the impact and duration of successive lockdowns and the associated economic damage done to economies; (2) the scale and design of the economic stimulus policies applied during the health crisis; (3) and how quickly an effective vaccine can be developed and distributed globally to combat the virus.

  1. The impact of the virus and the lockdowns has mainly been on older people and on the service sector, and particularly those activities that require in person presence such as live entertainment, restaurants, hotels, travel, and personal services such as beauty salons. In general, therefore, those economies with older aged populations and economies more dependent on services rather than manufacturing have suffered most. In some of these economies there will be permanent damage - or "scarring" - implying that some of those jobs or skills required pre-pandemic will not find a ready demand after the pandemic.

  2. The scale - and speed of implementation - of monetary and fiscal measures designed to deal with economic downturns resulting from the virus have been unprecedented. In the words of the IMF Fiscal Monitor of October 2020, "Governments' measures to cushion the blow from the pandemic total a staggering US$12 trillion globally."

  3. There are many vaccines in various stages of development and testing. It seems highly likely that an effective vaccine will be available in scale during the first half of 2021, even if repeated doses are required for sustained immunity. Looking forward, the revival of the service sector everywhere will be critically dependent on the development of an effective vaccine that gives people confidence to travel and gather in large groups again.

With major European economies such as Germany, France, Italy, Spain and the UK all embarking on new nationwide lockdowns (as opposed to local lockdowns), and the US experiencing new records in daily infections, there is no immediate relief in sight for these economies.

This means that the fourth quarter of 2020 may well see declines in real GDP, to be followed by an uncertain trajectory in 2021. The year ahead could include a weak first quarter in the northern hemisphere while the virus persists, to be followed by relatively strong bounce backs through the second and third quarters, especially if a vaccine becomes available. The recoveries in 2021 will be boosted by the huge monetary and fiscal stimulus policies adopted by central banks and governments across the developed world.

For this reason, the recovery in developed economies, once the virus is dealt with, will be much stronger than the anaemic, sub-par recovery which occurred in the aftermath of the Global Financial Crisis (GFC). A decade ago, banks and households needed to repair balance sheets by raising capital and/or de-leveraging and therefore could not take advantage of low interest rates to expand borrowing and spending. On this occasion there is no such problem. On the contrary, encouraged by the monetary and regulatory authorities, broad money and credit have, for the most part, been growing strongly in leading economies. This explains why equity and housing markets have been so buoyant. Such a background almost invariably leads subsequently to strong growth of spending - but this will only happen once the uncertainties and social distancing associated with the virus are largely overcome.

In China and other East Asian economies, by contrast, most economies are on a steady but unspectacular recovery path, aided by modest interest rate reductions and reserve requirement cuts. However, few have felt it necessary to engage in extraordinary measures such as quantitative easing (QE), and some, like China, have been restrained by the authorities' desire continue to de-leverage the economy. Asia has unquestionably performed better in suppressing the virus, but now and in 2021 it will likely be faced with the problem of generating an economic upswing in which the demand for its exports is less buoyant than in a typical export-led recovery. Economies like China and Japan should see good domestic demand growth, but exports, their traditional area of strength, will be slower to recover.

- John Greenwood,
Chief Economist,

- Adam Burton,
Senior Economist,

Investment risks - The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested Important information - Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice. Issued by Invesco Asset Management Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK.

Authorised and regulated by the Financial Conduct Authority.

These views are not necessarily those of Elson Associates but of the experts mentioned.

- uploaded - 13 January 2021

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Elson Associates does not offer advice as to the suitability of investments. If you are unsure whether an investment is suitable for you, you should obtain expert advice. Past performance of an investment is not necessarily a guide to its performance in the future. The value of investments or income from them may go down as well as up. You may not necessarily get back the amount you invested.

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