MINNEAPOLIS (December 7, 2020) – In the 2021 edition of its Global Insight Outlook, RBC Wealth Management predicts that economic headwinds from the pandemic will diminish and 2021 will be a year of worthwhile equity returns and strong earnings growth. The firm’s seasoned team of market analysts also expects interest rates will likely remain low, leading to above-average valuations and that equities will be the most attractive asset class in 2021. RBC Wealth Management also projects that the U.S. economy will regain its pre-pandemic high ground by late 2021/early 2022, a few months earlier than the UK, Europe and Japan. Meanwhile earnings, already in recovery, could surprise to the upside in 2021 and 2022 as some sectors and groups, crippled by the pandemic, return to life.
“The economic damage caused by COVID-19 should subside in 2021, while confidence in a return to a recognizable social and business landscape will likely grow,” said Kelly Bogdanova, vice president and portfolio analyst at RBC Wealth Management – U.S. “As GDP climbs back toward its pre-pandemic peak, corporate earnings, already recovering, could perform better than expected through 2021 and 2022.”
The strong rebound off the deep March lows suggests that investors have already paid in advance for some of that expected return to “normal.” However, that still leaves the S&P 500 only modestly above where it was in February 2020 before the pandemic, with all the other major averages in Canada, Europe, the UK, and Japan lingering below their pre-pandemic peaks.
Stocks in the major markets have priced in some of this better earnings trajectory but not all,” said Bogdanova. “We expect equities could provide attractive all-in returns in 2021, and probably for 2022 as well.”
Though GDP should return to its pre-pandemic numbers, slow growth is likely to continue throughout this coming decade. The Congressional Budget Office, a nonpartisan federal agency that prepares long-term forecasts of the U.S. economy for Congress, projects nominal GDP growth will average just 4.3% from 2020 to 2030. This slow growth should lead to increased competition and cause greater separation between the winners and losers in the market. To compete, companies will need to ramp up spending, particularly their technology spending as the digital economy is now thought to be approaching 10% of U.S. GDP.
“Firms need diverse capabilities if they intend to stay ahead or catch up to the competition,” said Bogdanova. “The pandemic has revealed that businesses without a viable, functioning digital presence are at an enormous competitive disadvantage.
Public debt has ballooned since the COVID-19 pandemic began, with that of advanced economies jumping almost 27 percent as a group since January 2020, according to the International Monetary Fund (IMF), and there are no signs that borrowing will let up anytime soon.
Debt loads are expected to be forced ever higher as further stimulus measures for the COVID-19 crisis are implemented and other crises inevitably hit, particularly in the U.S. The U.S. dollar’s status as the world’s reserve currency means there is underlying demand from institutional investors and governments globally for the debt America issues. Given this ease to finance itself and to print money, the U.S. may be even less inclined to reduce debt levels or meaningfully lower its rate of debt accumulation.
However, RBC Wealth Management says that the higher debt levels are not necessarily a sign of systemic risk. Higher Treasury supply alone is not sufficient to send yields higher, based on historical correlations. Factors such as the path of Fed policy rates, GDP growth, and inflation expectations matter to a much greater degree. As a result, deficits and overall levels of publicly held U.S. federal debt should not be a material concern for investors over the near and intermediate term.
RBC Wealth Management also expects debt servicing costs will remain manageable even in the medium term, though they will likely restrict governments’ budgetary choices, and warns that policymakers lack the incentive to address the issue of debt accumulation given borrowing costs in the market have remained low despite debt levels spiking.
“The pandemic seems to have led to a greater acceptance of high debt loads in the financial community and among government officials in the wake of the pandemic crisis. From a pure balance sheet perspective, higher debt loads are likely manageable in the near and intermediate term. However, at a minimum, high debt levels, while sustainable for the time being in most advanced economies, will eventually restrict governments’ budgetary flexibility and likely to result in higher tax rates,” said Bogdanova.
The 2021 edition of RBC Wealth Management’s Global Insight Outlook also examines the options for fixed income investors, presently confronted with ultralow rates, and presents RBC Wealth Management’s house view for global equity and fixed income markets in 2021, as well as currencies and commodities markets.
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In the United States, RBC Wealth Management operates as a division of RBC Capital Markets, LLC. Founded in 1909, RBC Capital Markets, LLC. is a member of the New York Stock Exchange, the Financial Industry Regulatory Authority, the Securities Investor Protection Corporation, and other major securities exchanges. RBC Wealth Management has $416 billion in total client assets with more than 2,000 financial advisors operating in 179 locations in 42 states.
Tim Nelson, RBC Wealth Management, 612-371-2239, or tim.nelson@rbc.com
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