Despite rising coronavirus cases and increased lockdown measures, there was a renewed sense of optimism about the global recovery as we said goodbye to 2020
Although many countries have begun the new year under strict lockdown measures, vaccinations are providing a light at the end of the tunnel. Investors are optimistic that life will return to normal gradually in 2021 and that the economy will begin to heal.
While there’s been a spike in coronavirus infections during the winter, economic activity seems to have become more resilient to Covid-19 restrictions. There are a number of possible explanations, including less public fear about the virus, improved government policies and increased preparation by businesses.
Central banks continue to hold interest rates at record low levels to help governments fund their spending programmes. Although government borrowing will inevitably continue to rise, the cost of servicing these debts should remain low.
Global recovery hopes boost markets
The increased sense of optimism about the global economic recovery has already rippled across financial markets and most major stock market indices rose in January. Emerging markets remained popular due to rising investor confidence and dollar weakness. Cyclical stocks that are more sensitive to economic growth, including energy, banking and industrials, also benefited as vaccines continued to be rolled out.
Economically sensitive sectors also received a boost following the slim ‘blue wave’ in the US election results. The Democrats have now secured both houses of Congress as well as the presidency, increasing expectations that the government will introduce further stimulus measures to support the economy.
The 10-year Treasury yield rose above 1% for the first time since March as investors anticipated increased issuance of government bonds to fund US spending packages. Yields on 10-year gilt yields also rose after sharp falls in December amid concerns about coronavirus restrictions.
What’s happening with GameStop?
Conditions in stock markets became more volatile towards the end of the month as amateur investors bought shares in struggling US video games retailer GameStop. As a result, the share price jumped from less than $20 at the end of December to almost $350 on 27 January.
The surge was attributed to a community of independent traders on Reddit who banded together against hedge funds that had predicted GameStop’s share price would drop. These professional investors were left nursing substantial losses.
Brexit risks fade on last-minute deal
The UK and EU began their post-Brexit trading arrangement in January. The long-awaited deal, struck on Christmas Eve, has resolved one of the major risks hanging over markets and pushed the pound and stock market higher.
At the same time, UK equities performed well overall. This pattern is a reversal of what we usually see, as a stronger pound generally negatively affects large-cap UK stocks. The situation reflects the UK stock market’s bias towards more economically sensitive areas of the economy, including energy and financials.
Green tech in the spotlight
The coronavirus pandemic has put environmental concerns and social inequalities into the spotlight, and policymakers have responded by declaring that the recovery can improve the world around us by “building back better”. In line with these shifting attitudes, green tech stocks have surged in popularity. For example, Tesla’s share price reached $900.40 in January, an increase of almost 700% over the past year.
Overall, the outlook is looking much brighter than it was this time last year. The IMF projects that global economic growth will rise by 5.5% this year and by 4.2% in 2022 (6). However, risks remain – coronavirus still poses a significant threat and central banks will need to keep an eye on inflation as the world returns to some form of normality.
The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.