Reflexion on 2020 and 2021 perspective
There is no other alternative during this time of the year than to think about the near-term future and review what happened last year, particularly in financial markets.
We must consider 2020 events and their inertia within our analyses before jumping to predict anything about next year. The year 2020 is not and will never be regarded as a standard year on any scale. Besides 2020's human suffering due to health and financial crisis, a unique and fantastic money printing by Central banks, the international political struggles in trade between world's powers, and the unconventional USA political scenario, the world financial market thrive in the end.
All these factors overwhelmed our sense of normality of every living soul and investor. And there is the baffling and reasonable outperformance in financial markets that not many people expected, and the birth of apparently new "financial bubbles" (or not?) in several trendy sectors.
These elements fueled investors' fierce appetite for seeking quick riches and short-term trading gains on daily leveraged contracts. So average investors, consciously or not, have reset their expectations to very high levels, regardless of risks.
In the middle of this scenario, I redraw; what could happen next?. That it is a question worthy of several Ph.D. studies with no trivial answers. Let us remember that any financial prediction accuracy is terrible, as many economic studies have proved for decades.
Nonetheless, here comes a couple of broad strokes of what we could expect. Please, do not call me to verify them in the future; I will deny them! You should know they are not a recommendation of any sort, just my most recent thoughts that most likely will change over time!.
Then allow me to get more technical; sometimes, oversimplification leads to wrong conclusions. The financial market does not represent the countries real economies most of the time. Most companies with access to the financial market tend to be a small sample, a biased one, of those more productive, innovative, and influential enterprises within the economy.
Moreover, most of the countries' employment and business activity comes from a network of small and medium enterprises, usually more service-oriented in developed markets and more manufacturing based in developing countries. So as the lockdowns were imposed during 2020 to fight the virus spread, the big losers were these networks of small and medium companies, especially those business models requiring in-person interactions or gatherings for manufacturing activities.
These in-person limitations lead to alternative business models, supported by new remote collaboration technologies and more automated processes (artificial intelligence) at an accelerated pace. So innovative companies flourish out of thin air while traditional ones collapsed within the service, real estate, and manufacturing sectors. But, will it be sustainable?
In any change, more productive business models can produce more with fewer resources, i.e., less labor. A typical capital vs. labor tradeoff, in these cases, software vs. people. How permanent will these changes be? How much market share will these innovators secure long term? It seems, so far, they are here to stay.
In the past, this tradeoff was gradual. Therefore it allowed a soft transition. People had more time adjusting to these past changes, retrain themselves, and find a different job. This time was abrupt, so it will take time to be assimilated. So how fast can the country's economic fiber reinvent itself to find new job opportunities for those displaced by the new trend? This could be the question to address in the next decade by politicians and academics.
By now, you must realize that even with an effective vaccine widely distributed and accepted, the future will look different, even with our freedoms of gathering restored. Humanity is luckier than in past pandemics. Science has paid off and found a solution, a myriad of vaccines in record time. Many lives have been lost already, but many will be saved, but not all the jobs will be there.
Governments and central banks issued vast amounts of debt required to be paid by future generations somehow. As it seems, there will be more debt to come very soon. The money we are spending today to create a "financial bridge" for many families and companies will eventually need to be repaid or diluted. There are always consequences, but we do not know how or when yet.
As it looks like today, we will be using all of the above strategies to pay this government-issued debt. There could be more taxes to pay, lower currency purchasing power, maybe lower social benefits, and many countries, states, and entities will struggle financially, so more "financial restructuring" efforts.
Meanwhile, the stock market, so far, looks impervious to any of these issues. A deep fear of missing out on the financial party is at every investor's heart. So high risk and prices rarely matter nowadays, but will it continue to be so?
Initial public offering or IPO are cashing in this trend. They are selling new issues of their stocks at breakneck prices. I am not saying they are not great companies among them, but certainly, not all deserve such valuations right now. Another example is the Special Purpose Acquisition Company or SPACs, an alternative for those who cannot pass the rigorous IPO processes. They are flourishing nowadays.
So, we may say that markets are without doubt "euphoric" at least. A great sentiment in the short term, but it might be a harbinger of things to come or at least a warning. As Mr. Shakespeare said, to be in the markets or not to be. That it is the question, and by how much? The right answer to this question is always personal; not every investor needs to have the same risk and appetite.
At the start, 2021 looks like a balancing act between higher stock valuations vs. hopes for stellar results, not so much space for errors in these calculations. The critical difference is that an economic recovery is in our favor; some of the most significant risks we faced (the epidemic) are known and with a solution. So the year 2021 seems like a battle between effective deployments of the vaccines across the globe vs. a slow recovery of the real economy.
At the same time, the government's efforts to support the economy via regulations, direct cash distributions, and credit facilities, if sustained, will keep asset prices inflated (or not?). A mere necessity of governments to exert direct control of the economy (or power illusion?). These relief packages will keep inflating asset prices unintentionally. Most likely will first flood financial markets. A lack of this artificial financial support will be harmful to markets, though, because it already accounted for investors.
We know more in 2021 about the scenario we might face. But excess liquidity pressures will keep finding space in global stock markets, although companies' reliable results might be needed to supported prices unless the unexpected stir markets again.
Some sectors have stretch valuations, mostly winners during the Covid crisis (Technology, Health Care, and Consumer Goods). These sectors need to perform very well on their 2021 quarterly reports because the market has very high expectations about them.
Other sectors who suffer the most, mostly cyclical sensitive sectors (Industrials, Banks, Service Sectors, others), have a low bar to beat, a 2020 bar. So an average financial result might be enough for them to excel.
As investors, we must ponder these contrasts and bet wisely to place our emphasis on getting an investment edge.
We had good training last year about anything unprecedented, so if 2021 wants to surprise us, it has a very high bar to reach.
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