A car with two accelerators and no brakes. This is how Philippe Gijsels (pictured right), chief strategist at BNP Paribas Fortis, describes current monetary and fiscal policies. Consequently, he expects 2021 will be a good year for risky assets.
In response to the pandemic, central banks intervened with an unprecedented amount of monetary stimulus that stabilised bond markets and powered stock markets. But what was really new was that governments also came up with huge amounts of financial stimuli. Chief economist Koen De Leus (left): ‘Monetary and fiscal policies are working hand in hand in this crisis, in contrast to previous recession episodes. At the time, low interest rates were needed to compensate for the austerity policy. After the 2008 crisis, this led to the least vigorous recovery in modern economic history.’
As a result, global debt exploded and that mountain of debt is more than likely to be disposed of in an unorthodox way. De Leus: ‘That process will probably continue for a long time after the pandemic has been contained.’ That policy of financial repression has a major impact on investment strategies. Gijsels: ‘It is clear that we will have to live with exceptionally low interest rates for a very long time to come. Inflation eats up your cash. In such an environment, one has to opt for higher-yielding assets such as equities, commodities, gold and real estate. That has been the basis of our strategy for a long time and the coronavirus crisis has only reinforced it.’
Bearing in mind the low interest rates, Gijsels argues that equities have never been this cheap. BNP Paribas Fortis is committed to both growth and value stocks. ‘Value stocks will probably benefit most from the economic recovery, but growth stocks also remain attractive on a long-term basis, despite the relatively high valuations,’ says Gijsels. The investment strategist also highlights two specific sectors: technology and biotech. ‘2021 will be more of a year of themes or sectors, with SRI and ESG continuing to reach high peaks.’
Commodity bull market
‘We are on the eve of a bull market for commodities,’ predicts Gijsels. On the one hand, demand will increase due to the strong economic growth in China (BNP Paribas Fortis expects growth of 8.6% in 2021), the recovering world economy and the electric revolution. Enormous amounts of copper and nickel are needed to make the transition to a world that runs more on electricity and less on oil. At the same time, producers are unable to keep up with rising demand because little has been invested in new capacity in recent years. And we know that creating extra capacity is a process of many years,’ says Gijsels, adding: ‘Even oil could rebound strongly in 2021.’
After many years of underperformance of growth markets against developed markets, the momentum now finally seems to have arrived for emerging countries. ‘They need economic growth, rising commodity prices and a weaker US dollar. These three conditions could well be met in the new year,’ predicts Gijsels.
Dangers
So 2021 is set to be the year of the recovery. For the euro zone, BNP Paribas Fortis expects an economic contraction of 7.5% this year and a recovery of 5.6% in 2021. Nevertheless, there are also dangers. ‘With the vaccine, major steps have already been taken in bringing the pandemic under control, but uncertainty remains about the timing and implementation. In addition, there are plenty of geopolitical hangovers that could cause negative surprises, including Brexit. Nevertheless, we assume that 2021 will be calmer than 2020,’ concludes Gijsels.