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This week has served as yet another reminder that economies and stock markets are two quite different beasts. The news has been awash with disturbing images of Trump supporters storming the Capitol while the virus has continued to run riot. 2021 seems to have taken up where 2020 left off.
Yet investors remain unfazed. Over this most downbeat of new years, global stock markets have soared to record highs. Is this a case of healthy optimism or misplaced idealism?
Let’s start with the US. Under the global spotlight for all the worst reasons this week, its S&P 500 shrugged off the attention to close 1.5% higher yesterday. The tech-heavy Nasdaq index, which initially fell when the Democrats won Georgia, ended yesterday 2.6% higher. Please remember past performance is not a reliable indicator of future returns.
In spite of everything, US investors do have reasons to be cheerful. A “blue sweep” of Democrat control has proven popular so far. Biden’s pledge for further stimulus packages should encourage economic recovery and ultimately prove a boon to stocks in the long run. Fears over corporate tax hikes and mounting debt are probably overstated - Biden won’t completely have his way over what remains a largely divided senate.
But the real fireworks have been going off in Asia. Inspired by Wall Street’s buoyancy and by wider recovery hopes, Japan’s Nikkei hit a three-decade high after closing 2.4% higher. MSCI’s broadest index of Asia-Pacific shares outside Japan also hit record highs, closing up 1%.
This may be a pattern we grow accustomed to over 2021. The US will continue to recover, abetted by bigger and better stimulus packages. Asian markets will be inspired to do even better. It is widely expected that Asia and Emerging Markets will outperform the US, which has led for so long.
In part that reflects several structural factors that have been long in the works. Growing middle classes, large populations and young workforces are long-term trends exhibited by many Asian economies that count as tasty ingredients for sustained growth.
Combine those long-term structural drivers with today’s unique set of circumstances and you concoct something of a perfect storm.
To start, Asia in general has coped far better with the virus than Europe and the Americas. Japan is currently struggling with a second wave and India fared worse than its neighbours, but the idea that it was ‘first in, first out’ of the pandemic rings true for much of the region.
China, in particular, has recovered from the pandemic with gusto. Long back to something resembling ‘normal’, the country’s CSI index rose over 25% over 2020, far outpacing the S&P 500. China, and India, are well poised to benefit from recovering domestic consumption growth.
The situation in America also stands to benefit North Asia. The dollar played its role as a safe haven currency for much of 2020 with aplomb, but its fortunes are starting to slide. Lowering interest rates across the pond and higher risk appetite are making the currency less attractive to investors.
A falling US dollar has traditionally been good news for Emerging Markets like Asia’s. Over the past 20 years, when the dollar weakened at least 5%, Emerging Market equities have gained on average 19% in dollar terms.
US bond yields should also remain low for the foreseeable future, despite rising slightly this week following news from Georgia. Emerging Market sovereign bonds look attractive by comparison. Without moving too far up the risk ladder, Chinese benchmark 10-year government bonds, for instance, are yielding at around 3.2% - a significant gain on the US 10-year benchmark, which is hovering around 1%, and should stay there.
One person who has been thinking a lot about the outlook for global stock markets recently is Tom Stevenson, Investment Director here at Fidelity, who has just published his latest Market Outlook for the first quarter of 2021. You can find a copy of the outlook here. You can also watch the webcast, in which Tom explains his thinking and joins Emma-Lou Montgomery to answer your questions, or listen to the latest MoneyTalk podcast in which Tom and Ed Monk discuss some more of the questions you’ve been asking us. You can listen to the podcast here or wherever you usually get your podcasts.
Five year performance
|MSCI Emerging Markets||11.6||37.8||-14.2||18.9||18.7|
|China CSI 300||-11.6||21.9||-25.6||34.6||29.4|
Past performance is not a reliable indicator of future returns
Source: Refinitiv, as at 31.12.20, total returns in USD terms
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Select 50 is not a personal recommendation to buy or sell a fund. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.