January 2021 / MARKET OUTLOOK
Global Asset Allocation: January Insights
Discover the latest global market themes
MARKET INSIGHTS
As of 31 December 2020
Chasing Unicorns
Unprecedented monetary and fiscal stimulus and late‑year positive news on vaccines fueled a relentless rally in risk assets in 2020, with the S&P 500 Index returning over 16%, and pushing valuations to levels not seen since the tech bubble. Market momentum has been further fuelled by an astounding number of companies going public, with initial public offering (IPO) activity at its highest level in two decades. Many of these unicorn companies—those going public with multi-billion-dollar valuations—such as Airbnb and DoorDash, both of which are still losing money, saw their prices soar more than 80% in the week they launched. Investors similarly have been hot to jump into special purpose acquisition companies (SPACs), or ‘blank cheque’ companies, that pool together investors’ money through an IPO before deciding what to invest in. Cryptocurrencies have also garnered significant interest this year, further fueling the speculative enthusiasm. Going into 2021, investors don’t seem fazed that these signs of excess could be foreshadowing a replay of 2000, and companies seeking to go public don’t appear to be slowing down anytime soon.
Inflation, for real?
After more than a decade of Fed policy geared towards stimulating growth and higher inflation, could the recovery from the coronavirus finally be the catalyst for higher prices? The market seems to be betting that it could, with breakeven rates—the yield difference between nominal and inflation-linked Treasuries—nearing the 2% level. With high expectations for unleashed pent-up demand on the way, supply will have to play catch-up in the second half of 2021, likely pushing inflation higher. One key component of the consumer price index—shelter prices—has already received a boost as the coronavirus has unexpectedly fueled a housing boom. Back in August, the Fed unveiled a new approach, allowing inflation to ‘average’ 2% over time, with an emphasis on sustained growth. Given the new policy, inflation expectations may be allowed to move higher into 2021 with markets less fearful of the Fed. With the Fed remaining anchored and with higher inflation, real yields could be pushed even lower.
Suga High
Investors have newfound interest in Japan as evident in strong flows, the Nikkei 225 Index reaching a 30-year high and optimism surrounding the election of new Prime Minister Yoshihide Suga last September. Suga, while dealing with the impacts of the coronavirus, has promised to remain focused on his predecessor’s structural reform policies—known as ‘Abenomics’—that have driven shareholder‑friendly initiatives, including an acceleration in share buybacks. He additionally created a new digital agency focused on the need to improve productivity, a problem that still plagues the government and many companies, even though Japan is known as a powerhouse of technical innovation in areas such as semiconductors and robotics. While cheering these structural reforms, investors also see the opportunity for Japan’s heavily export-oriented sectors to benefit as global economies reemerge from lockdowns this year. With these cyclical and secular forces helping to drive growth, there may be more to cheer about in Japan this summer than just the Olympic games.
Past performance is not a reliable indicator of future performance.
Sources: Nikkei, Bloomberg Finance L.P., and T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved. See Additional Disclosures.
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Yoram Lustig is the head of Multi-Asset Solutions, EMEA and Latin America, in the Multi-Asset Division. He also is a portfolio manager and the chair of the UK and European Investment Committees.