FERI Markets Update December 2020 - High Hopes for the New Year

This time, the traditional end-of-year rally in the stock markets is being spurred on by the prospect of the imminent deployment of effective Covid-19 vaccines. However, once the vaccine euphoria subsides, the markets, which often appear overbought, are likely to become more fragile. In addition, the economic data in the USA and Europe have recently become gloomier again due to new lockdowns. Overall, however, the outlook for the 2021 stock market year remains positive. The fundamental recovery will be additionally fuelled by ultra-expansive monetary policy and spending-friendly fiscal policy. However, since the stock markets have already priced in large parts of this scenario, investors should not expect prices to rise steadily in 2021. The containment of the pandemic could take much longer than expected due to the vaccination scepticism of many people. It is also unclear how the tensions between the US and China and with countries such as Russia and Iran will develop under the future US President Biden. If the fundamental recovery were to be much faster than expected, the financial markets could also react by raising interest rates. The US equity market would then be particularly affected, which could come under pressure due to the vulnerability of the technology sector to rising interest rates. Although the fundamental recovery scenario generally argues in favour of a more aggressive investment strategy with a focus on sectors that are sensitive to economic cycles, the financial markets would then be forced to react with interest rate increases. However, in view of the overall high valuation levels and the risk scenarios outlined, significant setbacks cannot be ruled out. Investors should therefore prepare themselves for active and flexible risk management in 2021.

The Uncanny Power of Central Banks

The year 2020 has once again shown investors the dominant position of the global central banks. To mitigate the economic consequences of the Corona crisis and to finance the lavish bailout packages of the states, the US Federal Reserve FED, the European Central Bank ECB and other central banks unleashed a veritable flood of liquidity. The international stock markets benefited from this massive expansion of money creation in the course of the year. They are now blindly relying on the central banks to provide virtually unlimited aid in an emergency. This reaction pattern is becoming increasingly worrying, as it means that an ever higher dose of monetary stimulus will be needed in future crises. The close interaction of monetary and fiscal policy in the Corona crisis, which de facto resembles open government financing by the central banks, shows how dangerous this path is. Although liquidity injections and stimulus packages support the economy in the short term, in the long term this policy leads to a steady monetary dilution of the financial system. In this environment, the attractiveness of tangible assets, such as equities and precious metals, clearly increases compared to nominal investments such as government bonds.