Because for the stock exchanges the worst is perhaps behind them
"European equities: the pinnacle of pessimism is now behind us", by Ann Steele, portfolio manager at Columbia Threadneedle Investments
In 2021 the world will change! Brexit will have ended, there will be a new president in the White House and vaccines against Covid-19 will be available. The negative trends of 2020 are not completely over yet, but we can be optimistic. We can expect a sharp recovery in the earnings of companies affected by the virus, as well as support from fiscal stimulus measures, abundant liquidity and a recovery for companies and consumers.
Europe boasts a large number of solid companies: with valid brands, globally competitive and that can count on excellent pricing power and excellent management. Earnings will catch up and companies that have withstood the crisis and were oversold in 2020 will rebound. However, some companies will not survive or will be penalized by the crisis. So, given the presence of leaders and rears, performance as always will depend on stock selection.
Brexit could seriously damage both European and British companies, even if the agreement reached appears to be a good goal. However, the complexity of production chains and operations continues to raise concerns about potential destabilization.
In 2021, Joe Biden could agree on a common global agenda with the United Nations Conference on Climate Change, with a new US orientation on the issue. Also taking into account the recent announcement of China's intention to zero net carbon emissions by 2060, these developments could usher in the launch of a coherent policy on a global scale; it is therefore essential to re-evaluate the positioning on environmental issues worldwide.
There are reasons for optimism for 2021. Forget the U-shaped recovery; the 2021 letter is the "V" for "vaccine". According to our reference scenario, in the first part of 2021 Europe will see the distribution of vaccines, which will allow businesses and consumers to start returning to normal. Even in the event of delays and further closures, the economic impact of Covid-19 is expected to reduce significantly in the new year.
We expect a clear recovery in the profits of the companies affected by the virus, as well as support from fiscal stimulus measures at European level, liquidity injections from central banks and a restart for companies and consumers.
Unemployment is expected to rise, but many of the European consumers who have kept their jobs have built up cash reserves, as evidenced by the savings rate of households in the eurozone, which reached a record high of 24.6% in the second quarter of 2020 .
The European Union has approved a € 750 billion stimulus package to tackle the pandemic, and quantitative easing and historically low interest rates from the European Central Bank, the Bank of England and other European central institutions are expected to continue into the 2021.
Numerous European companies have cut costs and improved operational efficiency in the wake of Covid-19. This is why our central thesis assumes that European equities enjoy good support. Nonetheless, we believe that some companies will not survive or be penalized by the crisis. So, given the presence of leaders and rears, performance as always will depend on stock selection.
We are of the opinion that the European winners of 2021 will fall into two categories. The first is made up of globally competitive companies with strong brands, strong management teams and strong pricing power. Often the business models of these companies have safeguarded their earnings in 2020 and in some cases, such as healthcare and technology, have enabled them to take advantage of the “new normal” environment.
"It being understood that there will be leaders and rears among European equities, performance as always will depend on stock selection."
The second brings together those companies that have suffered a decline in profits but also a collapse in prices, stocks heavily oversold at the end of the year, which in some cases did not deserve such severe punishment. We expect many of these stocks to show a solid recovery in earnings in 2021. Also, as 2020 draws to a close, many European companies are cheap enough to suggest a boom in mergers and acquisitions.
In light of this, just as in 2020, stock selection will be key and will leverage Columbia Threadneedle Investments' greatest strengths, where investment decisions are supported by a full team of experienced sector analysts.
In addition to the vaccine, two other issues will affect European equity markets in early 2021: the relationship between London and Brussels after Brexit and the impact of Joe Biden's arrival as president of the US.
Potential trade disruptions for both British and European companies need to be taken into account next year due to the reorganization of production chains. However, taking into account the willingness of both sides to settle the disagreements, we expect any major issues to be short-lived.
For his part, Biden's victory has already had a positive impact on global markets: stock indices rallied sharply in the aftermath of the election and as the new administration's top positions were announced. Climate is likely to return to the fore globally, especially in light of the upcoming United Nations Conference on Climate Change as well as China's promise to zero net carbon emissions by 2060 . This is good for strategies that apply environmental, social and governance (ESG) criteria.
"As 2020 draws to a close, many European companies are cheap enough to suggest a boom in mergers and acquisitions."
2020 was a challenging year for investors. From its lowest point to its highest point (during the lockdown in March, at the height of pessimism), the Euro Stoxx 50 Index dropped almost 40%. And for equity investors that means there are potential gains to pursue.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/perche-per-le-borse-azionarie-il-peggio-e-forse-dietro-le-spalle/ on Sat, 20 Mar 2021 10:51:16 +0000.