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A return to (almost) normal

Market Insights 11.12.2020




Laurent Denize

Laurent Denize,

Our baseline scenario is that vaccines should allow a gradual reopening of the economic sectors that are currently shut down

The announcement by Pfizer / BioNTech and then Moderna of a vaccine with 95% efficiency clearly changed investors' perspective offering a vision of the end of the pandemic or at least of its consequences. The announcement by Oxford / AstraZeneca is also a source of optimism, even if the trial results are less conclusive. In addition, other vaccines are currently in the final stages of testing. Ultimately, approximately 1.5 billion people worldwide could be vaccinated over the next 6 months. Without obscuring the many problems related to vaccine transport and storage, public acceptance of mRNA technology, mass production, and managing its diffusion, it is reasonable to think that there is light at the end of the tunnel.

Our baseline scenario is that vaccines should allow a gradual reopening of the economic sectors that are currently shut down. If this is the case, they will lead to an improvement in employment, a return of consumer and business confidence, and an acceleration of aggregate demand driven by spending of involuntary savings. With less fear of being infected, consumers will return to stores, restaurants, hotels, etc. This will have a very positive impact on investment and profit growth. This will result in higher stock prices, notably a catch-up of cyclical and discounted stocks, as well as higher bond yields and commodity prices.

But as always, the devil is in the details. Thus, even if vaccines are widely adopted, short-term threats to economic activity remain. Counter-intuitively, the realization that the end of the pandemic is near may lead to a temporary period during which households remain cautious and behave very conservatively. After all, few consumers will want to contract the virus just before a vaccine becomes available. In addition, the vision of an end of containment reduces the urgency for tax authorities to provide additional support to the population and small businesses. These two dynamics could lead to a sharp contraction in spending in the first quarter of 2021, which would hurt equity markets.

In this context, what do we do?

Once again, central banks and fiscal stimuli will certainly come to the rescue of the markets. We do not doubt the support of the central banks, especially in the United States, even if, after the election, the Fed has currently adopted a waitand- see attitude towards the new government. On the other hand, any further delay in the ratification of the stimulus plans on both sides of the Atlantic will take away a few points of growth and reduce expectations of an increase in corporate earnings capacity. Let's hope that our governments become even more aware of the urgency of these plans, given that the halt to past plans made the economy "embark on a downward trend" (approximately 1.5 points of GDP after the end of the Care Act in the United States). This is the challenge of asset allocation for 2021, but we remain optimistic about the trajectory of risky assets over the next six months. The catchup effect and flows are only just beginning.

We will meet you in early January to discuss our investment strategy, with a central question: how to manage the exit from the crisis and such high levels of debt? As far as debt management is concerned, we see two main options for lowering debt ratios: an increase in taxes and/or faster growth in nominal GDP. The first option is difficult; beyond being unpopular, raising taxes (or savings) is deflationary and could worsen the debt arithmetic by raising real interest rates. At the same time, nominal rates can no longer fall because central banks will do everything possible to return to inflation levels capable of reducing the debt burden. Unfortunately, growth is below potential and unemployment is struggling to be reduced. The best scenario remains a sustainable economic recovery (in every sense of the word).

Happy holidays to all and take care.


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