Strong tailwinds for the capital markets
- Economic outlook: a challenging first half of the year, followed by a recovery from summer 2021
- Biden provides fresh stimulus for the US economy
- The combination of expansionary fiscal and monetary policy is supporting the capital markets
- Risk assets remain attractive
Frankfurt am Main, 18 February 2021 – The capital markets started 2021 on an optimistic note. Jens Wilhelm, member of the Board of Managing Directors of Union Investment responsible for portfolio management and real estate, believes that this is justified despite the lingering pandemic. “We are seeing strong tailwinds,” he explains. “The combination of expansionary monetary and fiscal policy and a breakthrough in the fight against the pandemic thanks to vaccination campaigns is providing a steady boost for risk assets.” Wilhelm therefore recommends investors to stay focused on opportunity-oriented investments: “The market is already starting to price in the end of the coronavirus crisis. Investors should not miss this opportunity, despite potential setbacks.”
With regard to the economic outlook, Wilhelm believes that the first half of the year will be challenging. “The high case numbers and lockdowns will have a substantial impact on economic growth,” he predicts. In the eurozone, gross domestic product (GDP) is expected to shrink by around 1.3 per cent in the first quarter of 2021, while Germany’s GDP could contract by as much as 2.0 per cent. “The pandemic will continue to weigh on the economy,” he concludes. However, the anticipated fall in coronavirus cases over the further course of the year should bring a strong revival of economic activity. In addition, vaccines should become more widely available from the summer, which should put the upturn on a solid footing. “Provided that we are not confronted with new virus mutations that we cannot control, the second half of the year should see the economy gradually return to a greater degree of normality,” says Wilhelm. This should allow industries that had been subject to heavy restrictions, such as the service sector, to ramp up their offering again, which – in turn – should accelerate economic growth. For 2021 as a whole, Wilhelm therefore predicts that GDP in the eurozone will grow by 4.9 per cent and German GDP by around 3.8 per cent.
Biden provides fresh stimulus for the US economy
Wilhelm’s view of the new US government under Joe Biden is positive: “The new administration in the White House is pursuing an agenda of economic modernisation at domestic level and a moderation of the tone of discourse in the foreign policy arena. Both will provide support for the capital markets.” He believes that Biden’s initiative to expand coronavirus support measures is a first indication of his determination, and was timed well from an economic policy perspective. At the same time, Wilhelm points out that the Democrats’ majority in Congress is very slim. “In the Senate, every vote matters and Joe Biden will have to pitch his policies so that they are palatable to even the most conservative among the Democratic senators.” He thinks that, from the point of view of the markets, this constraint will be beneficial because neither dramatic tax increases nor excessive government borrowing would be likely to win the backing of a majority in Congress. “The Biden administration’s scope for fiscal largesse is limited. This will protect the profitability of the US corporate sector and the credit standing of the state.” Wilhelm expects there to be one more stimulus package of a reasonable size towards the end of the first quarter with a focus on aspects such as renewable energy. This should give the US economy a boost and push economic growth in 2021 up to 4.9 per cent.
The combination of expansionary fiscal and monetary policy is supporting the capital markets
In addition to the fiscal policy stimulus, Wilhelm believes that the capital markets will also benefit from a continuation of expansionary monetary policy measures. “Tapering is currently not on the agenda of the central banks,” he concludes, citing both the need for support in the real economy and the greater tolerance of the central banks towards inflation. “There has been a paradigm shift at central bank level. As a result, monetary policy should remain loose even if signs of rising inflation start to emerge.” The coronavirus crisis also brought about a paradigm shift in fiscal policy. The greater willingness of governments to borrow more will last beyond the coronavirus crisis. This will be an important change in the landscape for the capital markets in the coming years.
Higher-yielding fixed-income investments favoured
Against the backdrop of persistently negative real rates of return, the wealth of savers investing in safe havens continues to be eroded when adjusted for inflation. “When it comes to investing your assets sensibly, ‘wait and see’ is not a good strategy,” Wilhelm says with conviction. He would encourage investors to opt for higher-yielding assets. On the fixed-income side, bonds that come with a risk premium remain attractive even though spreads have already contracted noticeably in certain areas, diminishing the upside potential. “Spreads on investment-grade corporate bonds, for example, have narrowed substantially,” Wilhelm notes. He points out that high-yield bonds offer greater potential returns but are also riskier. “These assets come with higher spreads but also with a higher default risk. This makes careful security selection all the more important.” Wilhelm also sees appeal in bonds from the emerging markets that are denominated in hard currencies: “In an environment of negative real interest rates, these assets are promising candidates for decent returns.”
Equity markets spurred by the prospect of an end to the coronavirus crisis
In Wilhelm’s opinion, equities continue to offer great upside potential as well. “The reporting season has shown that many companies have weathered the crisis well. In 2021, corporate profits should pick up noticeably,” he says confidently. This should also pave the way for further share price gains. Wilhelm expects that the German DAX index will rise to 14,700 points by the end of the year. Most of the upward movement will probably occur in the first half of the year. “Equities are an anticipatory asset class and the stock markets will start to price in the end of the pandemic in advance. This means that investors should not wait too long before joining the party,” says Wilhelm. He also recommends careful stock-picking. “The coronavirus crisis benefits some and hurts others. In this environment, it is particularly important to strategically select individual securities.”
Robust performance in the real estate sector thanks to diversification
To Wilhelm, real estate remains another important element of a balanced asset structure. “Negative real rates of return increase the appeal of tangible assets, especially if those assets combine strong cash flows and stable returns. High-quality real estate can offer this package of benefits.” A key advantage of fund solutions, especially in the prevailing conditions, is diversification. “Good diversification across different regions, types of use and tenants can mitigate the impact of the coronavirus crisis significantly,” emphasizes Wilhelm. He also sees good opportunities for solid yield growth in the rental market once the fallout from the pandemic has been overcome. “Real estate should always be part of any well-balanced portfolio,” he concludes.
Positive outlook for 2021, but some clouds on the horizon
All in all, Wilhelm remains positive about the outlook for the capital markets in 2021. “The stock markets have already adjusted to a post-coronavirus world to some extent. But major forces are still in play that will continue to boost the markets over the further course of the year,” he says, pointing to the combination of an economic upturn and expansionary fiscal and monetary policy. However, it will not be all plain sailing as Wilhelm does see a risk of intermittent disruption. Potential alarm bells could be setbacks in the fight against the pandemic, indications that the central banks intend to phase out monetary policy support measures, or issues in the corporate sector, e.g. in the high-yield bond market. “However, these topics should not come to the fore until the second half of the year at the earliest,” Wilhelm adds. He therefore recommends seizing opportunities in the capital markets at an early stage.
As at 18 February 2021