Brad’s eye view: A market view into 2021

Every year in December, analysts are asked to take a look into the new year with our best judgement, experience and crystal balls.  Let’s face it: we would be hard-pressed to find any article from last year that predicted anything like this year -- 2020!

So, before we look at what we might think will happen in 2021, let’s consider what we think WON’T happen next year:

Firstly, assuming diminishing COVID lockdowns with the ability to travel locally and globally, the demand for WTI and Brent Crude will stabilise thereby avoiding the disaster of the May 2020 WTI Contract going to -$40 per barrel on storage issues.

Secondly, we as traders will expect some form of normalcy as the steady stream of market-disrupting Tweets from the oval office should end just after 20 January 2021.  How many times were your intraday trades in EURUSD, the NASDAQ, XAUUSD, and myriad others, completely disrupted and sent the wrong way by misinformed, aggressive and unnecessary “fundamental events” ?

The saving grace of 2020 was the optimism of large investors who “bought the dip” in equities after the COVID crash, and the Central Banks, globally, who are using every tool at their disposal to keep economies afloat.  These, combined with strict financial regulations helped us avoid catastrophes like the Great Depression of 1929.

Surveys show that Central Bank and institutional net purchasing of gold should increase over 2020 rates keeping XAUUSD at current levels.  Any disruptions, of course, with equity sell-offs, bad news regarding COVID vaccines and lockdowns will invoke safe-haven buying of Gold driving it higher still.

Almost all Central Banks seem to have no inclination to entertain Interest Rate rises in 2021, based on the fact that many corporations, globally, are struggling with higher than average debt burdens due to Coronavirus.  The general consensus is that most Central Banks have run out, or are running out, of tools to balance their economies and we may see a few lowering interest rates, perhaps into negative territory.  This will, of course, devalue their respective currencies and increase the export potential for corporations within these economies.

Another tool in the bag of Central Governments is the ability to raise taxes, when required, to try to offset the crippling debt caused by Coronavirus Stimulus plans.  Who, where and when will be critical questions for investors as we head into 2021.  Any tax raise will increase the value of any currency and, as we trade FX in pairs, the question will be, “who will be the first to blink”.  For example, if any major economy raises taxes before another, this will cause an imbalance that every FX trader will recognise and be able to take financial advantage.

Initially, governments will try to avoid taxing corporations who are trying to maintain their payroll and employment initiatives and, instead, go after capital gains and high-net-worth individuals.

An event that may define the mood for 2021 is the 5th of January US Senate run-off in the state of Georgia.  Should the Democrats take these two seats and convince the Independents to side with them, Joe Biden, Nancy Pelosi, and Chuck Schumer will have full Democratic Party control over the Executive Branch, the House of Representatives and the Senate.  Even in the event of a tie in the Senate, Vice President Kamala Harris will be able to cast the tie-breaking votes if necessary.

With total control, we expect Joe Biden’s government to rush through the next package of stimulus to bolster the US economy, thereby weakening the USD and increasing share prices on most US equities and indices such as the NASDAQ and the S&P 500.

Of course, Biden’s first order of business will be to rally the nation together and get COVID-19 under control which will have a positive impact on said equities and indices, not just in the US.  All other regions trade with the world’s largest economy — the US — and we need this place back in shape.

In the US, and anywhere for that matter, having COVID-19 under control with vaccines, decreasing R numbers and universal travel health regulations, will see the equities from the travel and leisure sector recover, such as Royal Caribbean, TUI, Air France, Wynn Resorts and many more.

Due to the wide divergence of companies who have benefitted from Coronavirus and those who have suffered at the hand of COVID, we see an increase in Mergers and Acquisitions in 2021 affecting share prices, both negative and positive, of the equities involved.

Of course, we can’t look at 2021 and beyond without taking into account the pharma sector such as Pfizer, Bayer and Gilead.  Any more good news and progress on COVID vaccines will boost share prices and any news on side effects or failed vaccines will negatively affect share prices.  Keep an eye as well on possible M&A activity in the pharma sector as many of these companies have specific methods, technologies, patents and skills that may prove synergistic for each other.

Having said all this, I personally see the biggest source of optimism is Joe Biden’s ability to restore normal trade relations around the world, especially the challenge with China.  He won’t do it on his own, as his predecessor had tried and miserably failed, but he will engage all the other major world leaders, trade and finance ministers to reestablish normal agreements, remove and minimise pointless tariffs.  Ursula von der Leyen said it best, “China must be playing on a level playing field.”

Populism didn’t start with Donald Trump but he certainly did his best to encourage it during his 4 years in office.   The statistics don’t lie…globalism is far better for all economies around the world and we can expect rising indices, anywhere from the China A50, Nikkei and Hang Seng, to the DAX and FTSE, to the Dow Jones, if we see progress, fair trade agreements and cooperation between nations instead of the antagonistic tactics and intentional alienation of partners, which has been perpetuated by the current US administration.

Renewed interest in the Crypto market by big investors with instruments like BitCoin and Ethereum look positive for 2021 despite regulators clamping down on Crypto derivatives.  VISA for example, are giving BitCoin to their credit card users as a bonus and PayPal are rolling out the trading of Cryptocurrencies in their platform.

And last but not least, governments and investors all over the world, heavily encouraged by Central Banks, will be investing billions in Green initiatives and companies supporting these initiatives.  Influencers like Mark Carney and Christine LaGarde have stated, “It will be expensive but we can’t afford NOT to do it.”  This will pave the way for new potential and some exciting investment opportunities in 2021 and beyond.