As we entered the new year, we have to continue to grapple with the opportunities and challenges that lie ahead. We can now focus on fundamentals and global topical issues to assess and determine how the financial markets would be like in 2021.
With the vaccine rollout ramping up in the coming months, we have a lot to look forward to as we put this virus in the rear-view mirror. The road won’t be easy though, as different virus variants flare up and it could take the remainder of the year, and beyond for the rest of the world to get vaccinated.
The Federal Reserve and its easy monetary policy have been the main underpinning support to markets and that will continue for a while to come. We believe that they will take their time in removing any of their 2020 easing steps. FOMC Chair Jerome Powell reiterated his previous stance, saying that it is too early to discuss tapering asset purchases as the recovery path ahead remains highly uncertain, although several developments point to improved outlook later this year. He highlighted fiscal policy has been absolutely essential and the support from fiscal policy will help weather downturn and limit lasting damage.
On the fiscal side, the Biden administration has come forth with a proposed $1.9 trillion spending bill. The US debt accumulation is accelerating and becoming a looming issue long term.
The vaccine will certainly lay the groundwork for a return to near normalcy to our daily lives. Markets will also need to adjust though, particularly interest rates, and we must keep in mind what that could potentially mean for valuations. So while the global economy should see much better economic growth numbers in the second half of 2021 as the vaccine rollout picks up steam, the markets will also have to adjust to possible rising interest rates and central banks that should be talking about tapering their extreme accommodation. We will be monitoring this closely all year.
The pandemic is not the only problem confounding policymakers. To refresh, firstly the growing conflict between the US and China raises the possibility of developments in areas such as trade or technology that could hurt world trade. Secondly, protectionism is likely to continue to undermine the global trade regime. Thirdly, competition will accelerate technological transformation in multiple areas offering new business opportunities. Fourthly, the extreme monetary policies have increased financial vulnerabilities. These are the medium to long term issues we will talk about in our future newsletters. As of now, we are optimistic on the financial markets as a whole, but these are issues we need to consider before deciding on how and where to invest to achieve good returns.