Ruchir Sharma, Head of Emerging Markets and Chief Global Strategist, Morgan Stanley Investment Management, in a recent note has highlighted the fact that the COVID-19 pandemic has accelerated key global trends, most notably the adoption of digital technologies and the expanding role of government in the economy. According to Sharma, the top trends for 2021 look at how these themes are likely to evolve, reshaping prospects for inflation, easy money, the dollar and emerging markets, and recasting the profile of global market winners and losers.
Here are some excerpts from the note published on the website of Morgan Stanley. The impending changes in the economy leading up to the industries that could gain out of the changing trends will be something global investors will keep an eye on. The market leaders in these sectors will be better placed to ride the next wave in the stock market.
1. Soggy Markets and a Surging Economy
Surveys show investors expect another strong year for financial markets, this time amid a recovering economy. We think they’re half right. The economic recovery is likely to continue, but markets could easily start moving sideways, for three basic reasons. A massive stimulus is still lifting economies but threatens to revive inflation and raise bond yields, with worse consequences for stocks than most investors realize. The 2020 surge in savings, much of which went into the stock markets, is also unlikely to continue, particularly as the pandemic winds down and consumers start spending again. Moreover, investors came early on to view the pandemic as a passing natural disaster, and its end is already priced in to record-high valuations.
2. Bottoming Inflation
There are four factors that are threatening to revive inflation. These include depopulation, deglobalization, declining productivity and debt. The global decline, driven in part by governments bailing out unproductive companies, raises businesses’ cost and pushes up consumer prices. Also, rising government debt, including trillions to pay for pandemic stimulus packages, could be the jolt that reawakens inflation.
3. Housing in Demand
Ninety per cent of the world’s central banks have dropped short-term rates to record lows, which has in turn pushed 30-year mortgage rates to record lows—under 3% in the U.S. and even less in Europe. After the pandemic dies down, lingering housing demand pressure from young families fed up with cramped spaces may continue to drive up home prices.
4. Easy Money Drying Up
The potential return of consumer price inflation could compel central banks to tighten again, which we expect to come first in the form of reduced bond-buying (not higher rates). To give a sense of the scale: The $8 trillion in assets that central banks purchased last year was 40 times what they bought in 2019. Even a partial return to normal could have a sobering effect on markets.
5. A Post-Dollar World
As the U.S. rolled out trillions of dollars in new stimulus spending in 2020, its debts to the rest of the world spiked to well above 50% of GDP—a level that has often triggered financial crises. Today, the dollar is the undisputed reserve currency, but the empires that held this coveted status in the past faltered when the rest of the world lost confidence that they could pay their bills.
Up to now, U.S. policymakers saw no serious rivals to the dollar. But the big surprise of 2020 was the emergence of Bitcoin as both a store of value (a digital option to gold) and a medium of exchange (a digital option to the dollar).
6. A Commodities Revival
Commodity prices have declined steadily in real terms since records begin in the 1850s, but that long decline is punctuated by boom decades. We may be entering one now. Weak prices during the 2010s led to light investment and supply cuts in everything from oil fields to copper mines. Couple tight supply with rising demand in a post-pandemic recovery, and you have the recipe for a revival in commodity prices.
7. An Emerging Market Comeback
Today, the top emerging markets account for 36% of global GDP and just 12% of the global stock market, while the U.S. accounts for 25% of GDP and 56% of markets. Imbalances of this extreme tend to diminish over time.
8. A Digital Revolution
One big reason the digital revolution is advancing so fast in emerging countries is simple: Lack of existing infrastructure. This digital boost to productivity is likely to support an emerging-market comeback.
9. Rising Challengers
E-commerce giants in the U.S. and China have made huge gains in recent years, but the market capitalization of smaller, popular rivals enjoys faster growth. It’s very possible that some of the challengers will catch up.
10. New Media Habits
It’s no secret that the pandemic has been good for online entertainment. Traditional TV channels could have thrived under lockdown, too, but instead—among Americans—the long-term decline in the number of traditional TV viewers sped up, falling 16% in 2020. Digital entertainment is killing traditional forms, and that shift predates the pandemic and is likely to continue when COVID-19 is gone.