US to pass the baton of global growth leadership to Europe in 2021 – Charles Schwab

Economists at Charles Schwab expect a near-term economic double-dip for the global economy gives way to a vaccine-led broad recovery in 2021. The new cycle comes with new leadership as international economic and earnings growth are likely to exceed the US for the first time in years, supporting relative outperformance by international stocks.

Key quotes

“The global economy has the potential to make a full recovery in 2021, rebounding from the -4.4% decline in 2020 with the growth of +5.2% in 2021, according to current estimates from the International Monetary Fund (IMF). Next year, we expect a very easy monetary and fiscal policy combined with a vaccine rollout beginning in the first half of 2021 to lead to a strong rise in economic and earnings growth. This 2021 backdrop may see the US pass the baton of global growth leadership to Europe, favoring international stocks and a broader overall market advance compared to 2020.”

“Key signs that let us know we are on the path to recovery that we are hoping to see in the year ahead include the second wave of lockdowns end this winter, having successfully contained infections with less economic impact than the first wave in March and April, approval of at least one vaccine by early 2021 with mass immunization to begin by spring and a sharp rebound in economic activity in virus-depressed sectors as immunity builds up over the summer.”

“The strong vaccine-led recovery in global growth aided by accommodative policy expected for 2021 should favor stocks in general, especially economically sensitive stocks. While improving in November, cyclical stocks have generally moved sideways since early June, leading us to believe that markets have not yet priced a broad recovery. This disconnect within the stock market is hiding what we believe could be a long-term shift favoring international stocks.”

“Emerging market stocks usually outperform developed market stocks in the first year of an economic recovery. Now we know that emerging markets were ground zero for the COVID-19 crisis, which started in China. However, most major emerging market economies came into this recession with fewer fiscal and monetary imbalances compared to the prior two recessions, having more manageable debt and deficits and even trade surpluses in some cases. Additionally, central banks acted swiftly to alleviate financial stress in global markets, allowing for emerging market policymakers to quickly enact stimulus without concern of a weakening currency. This healthier backdrop for emerging markets, combined with the global economic rebound and weaker dollar may propel the performance of emerging market stocks during the new cycle.”


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