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What will happen to world markets after the COVID-19 pandemic?

· 7 minute read

· 7 minute read

One of the great surprises of 2020 was the relative buoyancy of the stock market even as a raging pandemic killed millions and many sectors of the global economy were plunged into recession. And one of the biggest questions facing investors in 2021 is whether global markets can continue their upward trajectory — or if they might succumb to rising debt loads, continued political and social unrest, or simply a lack of investor confidence.

As part of its The World Emerges: Reuters Breakingviews Predictions 2021 series, Reuters led two recent discussions that covered a wide range of issues, including whether widespread vaccinations would unleash pent-up market demand; the prospects for green technologies; consumer demand for sustainable supply chains; the extent to which companies around the world will embrace socially responsible Environmental, Social, and Governance (ESG) investment criteria — and, of course, the overall impact of the in-coming Biden administration on the global economy, particularly with regard to China/U.S. relations.

In one discussion, a panel discussion of leading financial experts took up the question of whether the market boom would continue after the COVID-19 pandemic subsides.

A charging green bull?

The general theme of the conversation was a bullish one — namely that in 2021, unleashed market demand will likely fuel growth in many sectors of the economy (particularly those related to green technology and infrastructure), and consumer demand for more responsible corporate governance will continue to move the guardrails of capitalism toward a more sustainable, equitable future.

One of the biggest market factors in 2021 will be the U.S.’s re-engagement with the world under the Biden presidency, said Evy Hambro, global head of thematic and sector investing for BlackRock. “Re-signing up for the Paris [Climate] Accord and a lot of fiscal spending aligned to green-related policies, whether it’s infrastructure or renewables, etc. — that’s going to play a major part in both the U.S. and global economies,” Hambro said.

There was also general agreement among the panelists that ESG investment criteria would continue to influence boardroom decisions in 2021, and companies that take ESG seriously would be increasingly embraced by investors worldwide.

“In the future, we’re not just trying to build sustainable businesses that produce cash and cash returns, but businesses that enrich the lives of all the stakeholders that participate in it.”

However, Lynn Forester de Rothschild, CEO of E.L. Rothschild, cautioned that slapping “ESG” on an investment brochure would not be sufficient; rather, the effort must be sincere. “It’s not going to be enough to just label something an ESG product,” Forester de Rothschild explained. “There’s going to be accountability for how managers are forcing change in the companies they invest in.”

In a separate one-on-one discussion with Oliver Baete, CEO of Allianz, the largest European insurer, Baete said he was very pleased that climate change issues were not forgotten even during the height of the pandemic, adding that countries and corporations have to move forward on the “practicality of implementation” of their commitment to address climate change because “that commitment is irreversible.”

The biggest challenge post-pandemic, Baete noted, was how societies were going to adjust psychologically to coming out of the pandemic. “It all very much depends on the level of confidence among investors, consumers, and entrepreneurs as to whether will we see a boost in consumption and investment.” Much of that, he added, will depend on the success of continued vaccinations across the globe.

Investing in social responsibility

For investors who are confident in the future and may be in search of opportunities, another cultural shift to consider is the demand for sustainable, eco-friendly practices that go far beyond the product itself to how the product was sourced, processed, packaged, marketed, and delivered, the panel said.

“The adoption of socially responsible principles goes all the way back down the supply chain,” said Rishi Kapoor, co-CEO of Investcorp, as consumers continue to search for products that reflect their values and ideals. “In the future, we’re not just trying to build sustainable businesses that produce cash and cash returns, but businesses that enrich the lives of all the stakeholders that participate in it,” he said. “We believe very strongly that this is where the investment universe is going.”

The possibility of inflation rearing its ugly head after so many years of near-zero interest rates was also discussed by both the panel and Baete. But concerns that a newly energized economy might fuel inflation were muted by the recognition that inflation isn’t all bad, particularly if it is a result of energized markets driving higher valuations.

“Runaway inflation is not good for secondary markets, but some inflation in equity markets is actually good,” said Fabiana Fedeli, global head of fundamental equities for Robeco. “We still believe that inflation will be quite benign over the year.”

Baete agreed that a post-pandemic recovery boom could spark inflation, but noted that one generally unasked question is about the level of debt that many countries have taken on during the pandemic to support their economies. “When and how this debt will be addressed is not a question that is being asked,” he said, adding that if it is ignored, it will end up being “a question for our children to address.”

China/US relations

With China poised to overtake the U.S. as the world’s largest economy, there was some general concern among the panelists about how those power dynamics might play out, but most agreed that no matter what happens, there will be opportunities for smart investors.

According to Robeco’s Fedeli and Lynn Forester de Rothschild, U.S./China trade relations under the Biden administration probably won’t diverge too dramatically from the Trump administration’s approach, except for a possible emphasis on holding China accountable for human-rights violations, data manipulation, and intellectual property issues. “We continue to see a lot of interest in the overall Chinese market, and we believe China will be destined to become a core location in investors’ portfolios going forward,” Fedeli said.

“It all very much depends on the level of confidence among investors, consumers, and entrepreneurs as to whether will we see a boost in consumption and investment.”

BlackRock’s Evy Hambro agreed that “everybody is anticipating that the China will become the world’s largest economy. We all know it’s going to happen, and the capital will follow in terms of investment decisions,” he said. “We just need to be prepared for it and hopefully pick the right winners.”

Baete agreed about China’s growing strength, and cautioned the new Biden administration not to force the E.U. to choose between the U.S. and China, as the Trump administration effectively did over the past four years. “There needs to be a real partnership between the U.S. and the E.U. that respects the strength of both,” he explained.

That said, Baete worries about lofty market valuations and the lack of cushion they will provide in the event of a downturn brought by prematurely ending financial stimulus, social unrest (especially in the U.S.), or continued virus mutations. “Any one or a combination of these developments could create a significant opportunity for a market correction.”

This blog post was written by Thomson Reuters contributors Tad Simons and Gregg Wirth.

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