Covid-19 vaccine increases expectations for boosting economic activity

I am writing this letter at the end of the quarter and the end of the financial year, which witnessed different circumstances regarding what happened within the markets, and what happened between them as well. However, before I go into details, I must first clarify the economic background.

Not surprisingly, the introduction of a COVID-19 vaccine is now coloring all economic opinions about post-pandemic economic performance and placing many doubts around it. However, we believe that the most likely scenario is that global economic growth will be well above its average rate over the next three years. The main reasons behind this positive outlook are:

• The introduction of vaccines, which would allow the gradual lifting of restrictions on activity, especially in the second half of the year. However, the rollout of vaccines is going better in some countries than others, and this will benefit some companies faster than others.
• There is too much spare capacity in the global economy. So, until people who are out of work can find new jobs, and companies can get back to work quickly, it will take some time before wages and prices go up.
• Therefore, central banks will be happy to keep interest rates low, while governments will be wary about raising taxes too quickly, should they derail the economic recovery.

Expectations of broader economic growth were accompanied by associated expectations of similarly abundant growth in corporate profits. This led to further gains in stock prices during the last quarter. Most of the major stock markets are up 5-10%..

There has also been a change in the types of companies that investors prefer. Over the past decade, in an environment of less robust growth, investors have preferred and placed greater value on companies that have achieved (or were expected to achieve) higher earnings growth. These companies have often been in the technology-related areas of the market. The pandemic has further accelerated these trends. In particular, there was strong demand for companies that provide technology that enables home work and home delivery.

Nevertheless, in the past few months, the companies that would benefit from the end of the closure had begun to operate, including airlines, restaurants and the like. Mining companies, oil companies and other economically sensitive business sectors within the market also started to operate, as expectations increased for the global economy to return to its feet.

But where will the progress be from here?

The picture of economic growth referred to above is positive. But we must note once again the dependence on the introduction of the vaccine. As we have already seen in both the developed and developing world, this proposition is highly variable. Investors will watch his progress carefully.

Another thing on the investors' minds at the moment is the possibility of higher prices in the short term. But we are not concerned with this matter, and we believe that any price hike will be temporary due to the excess capacity in the economy. Inflation should fall below the targets of most central banks by the end of this year.

Accordingly, we see a continuing supportive environment for stock prices. The bumper economic growth and profits already observed indicate that companies whose profits are closely linked to the fortunes of the economy will do well.

But we must also recognize that many investors are more cautious about the outlook, and their main concern is that inflation will rise more quickly and be more steady than we expect. If it looks like this inflation will cause central banks to raise interest rates, it could cause higher levels of stock price volatility.

For those trying to build business portfolios, the situation is complex and there are many factors to consider. Continue wallet House View Our bias towards high quality stocks and bonds that pay reliable returns.

In terms of stocks, we prefer a mix of developed global equity markets. In the bond markets, we continue to favor higher yield bonds, but will have a slightly higher preference for developed market bonds over emerging government debt, as the former guarantees better value after the recent impact conditions.

We will continue to profit from investment grade corporate bonds. While issuers will continue to trade satisfactorily with lower defaults on bond payments, further price hikes are unlikely.

As a result of all of this, the importance of careful diversification, and of building a portfolio that can withstand the many bumps we can see in the road, but most importantly, are the bumps we don't.