The macro view: the top 5 themes set to move markets in 2021

We outline our key calls on the biggest trends to watch and compare how they line up with investor views from our annual survey.

Five macro themes to watch

We all know 2020 was far from an average year – along with the worst global pandemic in a century, it also saw the deepest global recession in history. But the good news is that the prospects for global growth look better in 2021 (see our economic outlook here).

We’ve identified five macro themes to watch in the year ahead and we’ve surveyed investors* to see how their views line up with ours: overall, there’s strong consensus on the direction of travel. Read on to find out more.

*Source: NatWest Markets 2021 Investor Survey, November 2020 – full report available on request.

1. Coronavirus in 2021: vaccines should boost consumer confidence, but varying shades of economic recovery and FX volatility will continue


Key calls:

  • A vaccine should spark a slow, steady recovery among global consumers in 2021. Sectors like transport and banks, and commodities, will benefit from a more confident consumer. 
  • While the pandemic was global, responses were local. The divergent responses we saw set the stage for significant country differentiation next year and, as a result, bigger currency movements.
  • Asia outperformed other regions in its management of the virus and enters 2021 with solid economic momentum.
  • In the west, waves of coronavirus are still coming and going, while the situation in the US is deteriorating. This has important implications for economic growth early in 2021.

The investor view:

  • Most investors believe global growth in 2021 will be at least as high as expected, if not higher. To put “expected” into context, NWM’s base case is for 5.3% growth.
  • Growth and inflation expectations are clearly underpinned by confidence that there will be a vaccine against coronavirus, which investors generally expect to be widely distributed in most countries by Q2/Q3 next year.

We head into 2021 at a major market inflexion point – viable vaccines have been developed in record time and distribution will begin in late 2020 in some countries. Herd immunity by summer next year is now a real prospect. Before then, the roll-out of vaccines, combined with better understanding of how to manage the virus, means the era of strict lockdowns may be coming to an end.

The coronavirus crisis created an unprecedented shock for global consumers. It should come as no surprise that our consumer confidence index has persistently lagged other confidence measures.

Our forecast for global growth assumes the impact on consumers will take time – with the big boost coming in H2 next year and into 2022.  But make no mistake, the global consumer could cause economic growth to be significantly higher than expected next year, and there is a chance that recovery could come earlier than we forecast.

The news about vaccines has already caused some rotation back into the sectors and markets that have suffered the most in 2020. Energy, banks, transportation and real estate should all have a better time in 2021. This sector rotation will be especially important in the credit markets, which we expect to remain range-bound. A consumer-led recovery should also see a rotation in commodity-linked markets, with oil and oil-linked currencies, such as the Canadian dollar and Norwegian krone, outperforming.

Meanwhile, vaccine availability is not likely to be uniform and judging from data on pre-ordering there is already a bulging gap between advanced economies and emerging ones. This divergence will continue to create varying shades of economic recovery and currency volatility. The below shows the orders for various vaccines measured by dose per population. Canada and the US are way ahead, with the UK and EU not far behind. Emerging economies have been much less able to secure pre-orders for vaccines.

2. A new paradigm: fiscal forever, even in Europe


Our key calls:

  • The fiscal response to the virus will have repercussions for years to come.
  • The post-coronavirus world won’t see a return to fiscal austerity.
  • Budget deficits and bond supply will remain sizeable compared with pre-crisis levels. Steeper curves are likely in 2021.

The investor view:

  • 73% of investors thought fiscal policy would remain loose far beyond the coronavirus crisis.
  • Investors expect this fiscal effort to be supported by quantitative easing rather than rate cuts.

This year saw the beginning of a new journey for global policymaking, and the main story was that fiscal dominance came roaring back. This was a theme we’d anticipated in our 2020 Year Ahead, albeit nowhere near to the extent that we’ve seen this year.

The past 12 months were game-changing for the euro area: national governments delivered a massive dose of fiscal support, while the EU’s Recovery Fund was an important first step towards genuine fiscal union. The region is ending 2020 in a stronger position than where it started.

But the fiscal response to the virus will have repercussions for years to come. The GDP*-weighted G10 policy rate was cut to a record low. The aggregate G10 central bank balance sheet nearly doubled to a record 60% of GDP. Quantitative easing is being used by nearly every advanced economy and even some emerging markets. Irrespective of what 2021 brings, we see only a handful of countries tightening monetary policy in the medium term: Norway, Poland, Chile and Brazil. Our estimate for the average primary fiscal deficit in advanced economies is 10% of GDP – an unprecedented figure during peacetime.

We don’t expect a rapid return to the kind of austerity policies we saw after the 2008 financial crisis. Policymakers have learned their lesson from the post-2008 era, and fiscal policy as the prominent counter-cyclical lever is here to stay as an aggressive support mechanism for economies.

A major implication of this is that budget deficits and bond supply will remain sizeable compared with pre-crisis levels.

*Gross Domestic Product

3. Inflation risks to tile higher


Our key calls: 

  • The foundations for higher inflation were in place before the pandemic, and we think the crisis is likely to have accelerated pre-existing trends.
  • Inflation markets aren’t currently pricing a rise in inflation.  

The investor view:

  • Inflation expectations are clearly skewed to the upside - 43% of investors thought that inflation could increase next year, while only 19% saw risks of it falling.

We’ve maintained since the start of the pandemic that the risks to medium-term inflation are tilted to the upside. We still hold that view.  For starters, we don’t see the post-2008 crisis as a natural comparison. Back then, the financial system globally needed attention and the fiscal channel was only used modestly and was turned off too quickly. None of these conditions apply today. Meanwhile, even if global output gaps are sizeable, we think they may close quicker than many expect, with demand and supply factors at play.

The post-2008 inflation experience is not a good guide for conditions today

What’s more, the foundations for higher inflation were already being laid before the coronavirus crisis began, although the process has probably accelerated as a result of the pandemic. Globalisation is in retreat and migration is slowing. Ageing populations are often viewed as a persistent disinflationary force, but this is not necessarily true and we could be at a tipping point – read more on why here.

Actual core inflation data suggest the jury is still out on what happens next. While coronavirus has not created the deflationary shock that most forecasters predicted, global core inflation is still very low and is likely to remain so well into 2021. If we separate the sectors that have been most and least impacted by the pandemic, it’s clear that the weakness in core consumer price index (CPI) inflation in 2020 is almost exclusively related to those sectors impacted by coronavirus, and that the weakness is far from over. Notably, those sectors less impacted by coronavirus have been broadly stable, leaving plenty for inflation bulls and bears to debate (see below chart).

4. Life after Brexit: short-term market frictions and questions for the longer-term economic vision


Key calls:

  • Brexit will involve both short and medium-term economic costs.
  • In the near-term, a likely trade deal should spark a bout of confidence in early 2021 but we expect any early market optimism for UK assets linked to a trade deal to fade quickly.
  • In the medium-term, we don’t expect UK GDP to return to its pre-coronavirus trend level until 2024.

The investor view:

  • There was relatively low conviction about what a UK-EU trade deal could look like. We asked investors how confident they were (on a scale of 1-5, with 5 being most confident) that the UK would secure a beneficial trade deal within the next 1-2 years, and the mean response was just above 2.5; almost exactly in the middle of the range.

Brexit is a process and not an event – from a macroeconomic perspective, the end of the transition period is actually the beginning of Brexit, not its conclusion. The early months of 2021 will be testing – even with the expected deal there will be new barriers to trade. But we’re more interested in a longer-term question: what is the UK’s post-Brexit economic model?

In the near term, the Bank of England expects Brexit frictions – principally weaker exports and supply-chain disruption – to reduce UK GDP by around 1 percentage point in Q1 2021. The UK will also be navigating its break-up with the EU in the wake of the coronavirus crisis: the country has already suffered one of the worst drops in GDP in the world, and the Brexit effect will mean it takes far longer to recover. We don’t expect UK GDP to return to pre-coronavirus levels until late 2022, and it won’t reach its pre-coronavirus trend level until 2024 (see chart below).

We expect any early market optimism for UK assets linked to a trade deal to fade quickly. Sterling has limited downside due to its cheap valuation and investors’ structural underweights in UK assets. But the “big” sterling rally many have anticipated in recent years is likely to prove elusive again. Gilt yields may get pulled higher in any global steepening.

UK GDP since the start of the crisis

Source:  NWM, Bloomberg


Over the medium term, reduced access to the EU market, lower investment and more constrained labour mobility are likely to damage UK productivity and economic growth. One of the challenges of gauging the macroeconomic impact of Brexit over the next year or so will lie in disentangling the effects of other influences – most obviously coronavirus and the normalisation in the level of GDP as the economy rebounds after the pandemic.

In the longer term, a bigger, almost existential, question remains unanswered: what is the UK’s post-Brexit economic vision? Previously, the UK provided a relatively low-tax, business-friendly base from which global corporations and financial institutions could access the world’s largest single market. With the pandemic having opened the fiscal floodgates there’s little prospect of any tax cuts for the foreseeable future, so the UK will struggle to mould itself as a European ‘Singapore’. Neither does aggressive deregulation seem likely. Promoting the City of London as a hub for ‘green’ finance is welcome, but it does not compensate for the loss of financial services passporting.


5. In the micro-isation of ESG: sustainable finance to move into the mainstream in 2021


Our key calls:

  • Governments are making major spending commitments and will issue bonds to back them.
  • The global green bond universe is set to grow by 60% in 2021.
  • Central banks and regulators will play big supporting roles.

The investor view:

  • Over 50% of investors said that they would have more interest in green bonds next year than they did this year.

We approach 2021 with significant political momentum for the sustainable finance market: US President-elect Biden has announced intentions to re-join the Paris Climate Agreement, the EU has set out its European Green Deal, China recently announced its aim to be carbon-neutral by 2060, and the UK has just announced a ten-step plan for a green industrial revolution and its intention to issue Green Gilts in 2021.

Sovereign, Supra and Agency gross GSS issuance is estimated to be $350 billion in 2021

There are three important factors in the “macro-isation” of sustainable finance in 2021. First, governments are setting ambitious targets for climate change and issuing huge amounts of debt to back these goals. We expect global green, social and sustainable issuance from Sovereigns, Supranational and Agency (SSA) to total over $350 billion in 2021, up from $190 billion in 2019. Second, central banks are making climate a fundamental consideration in their strategies. Finally, regulators are working to increase transparency in the sustainable financial markets.

2021 should see the green finance market move closer to critical mass – with far more supply, more consistent pricing, issuer incentives from central banks and better transparency. Our Investor Survey shows the changes are welcome. It also suggests that there will be plenty of demand for green bonds to meet the surge in supply.

Global gross Green, Social and Sustainable bond (GSS) issuance

Source:  NWM, Dealogic, Bloomberg


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