Approaching the dawn
COVID-19 has completely, and mercilessly, dictated the direction of economies and financial markets through most of this year. So, as we rapidly approach the end of an extremely unpredictable and volatile year, what's in store for 2021?
COVID-19 has completely, and mercilessly, dictated the direction of economies and financial markets through most of this year.
So, as we rapidly approach the end of an extremely unpredictable and volatile year, what's in store for 2021?
It should come as no great surprise that the global economic outlook and the likely behaviour of financial markets remain hinged to COVID-19, and more specifically to health outcomes and responses.
That's a key finding from our just-released report: Vanguard Economic and Market Outlook 2021: Approaching the dawn.
Authored by senior economists and investment strategists from across Vanguard, the VEMO 2021 report highlights that the pace of economic recovery ultimately will be driven by the rate at which populations develop COVID-19 immunity.
As the human immunity gap narrows, the current reluctance gap – the fear of spending – will also narrow, leading to stronger economic growth.
Room for economic optimism
With the rollout of COVID-19 vaccines increasing, there is room for optimism.
In the VEMO report, we outline our base case that major economies will achieve infection immunity (when the person-to-person spread of COVID-19 becomes unlikely) by the end of 2021.
This would result in economic activity normalising by the second-half and output reaching pre-pandemic levels by the end of 2021. If infection immunity does not occur, economies may only see marginal progress from current levels.
But assuming immunity rates do rise, unemployment levels are set to fall, and a cyclical bounce in inflation is expected to occur around mid-year. This brings some risk that markets could interpret higher inflation with a more pronounced, but unlikely, inflation outbreak.
However, overall, there's more upside than downside to our economic forecast based on vaccine developments.
Country-specific economic growth rates will be varied, with our base case forecast for Australia at 4 per cent. This will trail the United States and the euro area, which are both forecast to grow at 5.4 per cent in 2021.
The strongest forecasts are for the United Kingdom at 7.4 per cent, albeit from a low base, and for strong growth of around 9 per cent in China due to its more successful navigation of COVID-19.
The outlook for markets
The key investment lessons to absorb from 2020 are that it's vital stay the course with your strategy and not become distracted by short-term market events, no matter how severe they are at the time, and that portfolio diversification will ultimately smooth out volatility.
The benefits of diversification played out over the most recent market cycle where investors holding a global equity portfolio would have outperformed someone holding an all-Australian equity portfolio by about 5 per cent in year-to-date terms.
In the period ahead, Vanguard predicts the Australian market should slightly outperform globally as economic conditions improve.
Vanguard's Capital Markets Model projections for global equity returns are in the 5 per cent to 7 per cent over the next decade, and in the 5.5 per cent to 7.5 per cent ranges for Australia over same period.
Although below the returns seen over the last few decades, equities are expected to continue to outperform most other investments and the rate of inflation.
In Australia, equity prices have rebounded roughly 40 per cent from the trough in March and valuations are considered to be in the middle of their fair value band.
US and China valuations are not overly stretched but at the higher end of their value bands given the recent stronger rebounds in those markets.
Despite rising equity valuations, the outlook for the global equity risk premium is positive and has increased since last year given record low bond yields.
Low interest rates will remain a feature in 2021, and Vanguard expects bond portfolios of all types and maturities will earn yield returns close to current levels.
But we continue to believe in the diversification properties of bonds, particularly high-quality bonds, even in a low or negative interest rate environment.
An investor holding a diversified portfolio (60 per cent equity and 40 per cent fixed interest) during the most recent market sell-off in March would have fared better than someone with an all-equity portfolio.
Rather than used as a returns enhancer, bonds are a risk reducer to balance out cyclical risks in portfolios.
In 2021, it will be important for investors to remain disciplined and focused on long-term outcomes, and to accept that current macro-economic events may mean medium-term investment returns will be lower than those recorded over recent decades.
15 Dec, 2020
By Tony Kaye
Senior Personal Finance Writer, Vanguard Australia
vanguard.com.au
Hot Issues
- FBT Reminder – Odometer Reading
- ATO’s debts on hold campaign prompts new IGTO guidance
- A comprehensive collection of small business benchmarks
- The 2025 Financial Year tax & super changes you need to know!
- Underperforming employees: When can you terminate?
- A comprehensive list of guides to industry specific tax deductions.
- ‘Renewed concerns’ about economy sees consumer sentiment dip: Westpac
- Oldest Buildings in the World.
- Small businesses may ‘collapse under strain of payday super’, IPA warns
- ATO’s hands tied with scrapping on-hold debts, expert says
- What Drives Your Business Growth and Profits?
- Australian Taxation Office (ATO) shifting to firmer debt collection activity
- Why employee v contractor comes down to fine print
- Sharing economy reporting regime for platform operators
- Countries producing the most solar power by gigawatt hours
- Illegal access nets $637 million
- Accessing superannuation benefits.
- Does your business have a company Power of Attorney?
- Labor tweaks stage 3 tax cuts to make room for ‘middle Australia’
- GrantConnect
- 2 in 3 SMEs benefit from instant asset write-off, survey reveals
- Updated guidance on R&D claims
- Do you know how to recover debts?
- Wheat Production by Country
- Types of small business benchmarks
- Vimeo test
Article archive
- January - March 2024
- October - December 2023
- July - September 2023
- April - June 2023
- January - March 2023
- October - December 2022
- July - September 2022
- April - June 2022
- January - March 2022
- October - December 2021
- July - September 2021
- April - June 2021
- January - March 2021
- October - December 2020
- July - September 2020
- April - June 2020
- January - March 2020
- October - December 2019
- July - September 2019
- April - June 2019
- January - March 2019
- October - December 2018
- July - September 2018
- April - June 2018
- January - March 2018
- October - December 2017
- July - September 2017
- April - June 2017
- January - March 2017
- October - December 2016
- July - September 2016
- April - June 2016
- January - March 2016
- October - December 2015
- July - September 2015
- April - June 2015
- January - March 2015
- October - December 2014
January - March 2021 archive
- ATO’s good-faith approach to crypto won’t last much longer
- ‘Much more complex’: ATO introduces new partnership profit guidelines
- Cost of retirement up in December quarter
- Contributing to Superannuation
- ATO tipped to pounce once JobKeeper ends
- What’s Happening to Small Business Loans in Australia?
- ATO Revs Up As JobKeeper Set To End In March 2021
- Small businesses urged to register assets before insolvency explosion.
- ASIC sounds warning around high-yield bond scams
- JobMaker Resources - ATO
- Government mulls HECS-style business loans
- Industry pressure forces ATO’s hand on STP deadline
- $36bn withdrawn from super during COVID-19
- ATO opens claims for first JobMaker quarter
- Vaccination rates as they happen around the world
- Toyota returns $18m in JobKeeper payments
- Approaching the dawn
- Videos and other resources for our clients
- Brazen ATO scam costs Sydney woman $22k
- Key dates for the second JobKeeper extension period
- Returning expats reminded on tax snares with pensions, investments
- 80¢ per hour work-from-home deduction method extended
What our clients say about us