Santa’s outlook for 2021: coronavirus recovery, vaccines and inflation risks

We should expect a wealth of positive recovery and vaccine news early in the new year, with China leading the way, but also growing risks to business confidence

Richard Harris

Published: 10:15am, 18 Dec 2020

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I met the old boy wheezing up a track on the Lantau Trail. “I’ve taken up hill walking”, he puffed. “The pubs are shut and the beaches are closed. I have no idea why. Scientists say that no one has ever caught Covid-19 on a beach, so the shopping malls are now packed!”

Santa sat on a large rock overlooking the magnificently pristine Hong Kong seascape that the government is going to destroy with their “No Lantau Tomorrow” plan. He pulled out an enormous hip flask and took a large draught of Scotland’s finest essence.

His eyeballs rolled and he gasped as the amber nectar seared his throat. “Purely for medicinal purposes,” he grinned. “I know you want to ask my views on next year’s financial markets – this is the seventh year we’ve done it.”

A pause was an excuse for another enormous swig. “2021 is the easiest forecast of all because it’s all about momentum and trends. Markets are no longer supported by old-fashioned theories of value and economic rationality but by narrative.

“Zero interest rates mean that the old economic relationships and calculation of value that we knew and loved are now irrelevant. It’s all about the stories that move the market. It is the age of narrative finance.”

I looked puzzled. “2021 is very simple. It’s going to be dominated by the huge weight of money injected this year by the authorities to protect jobs and to stop the markets from going down. Listen. In 2008, the combined balance sheets of the European, Japanese, UK and US central banks totalled a mere US$4.1 trillion; today it is around US$21 trillion!

“That doesn’t even include Trump’s crazy US$2.3 trillion tax break in 2017. The money doesn’t disappear, it sloshes around the system looking for a home and that is usually the stock market.”

“What narratives are going to be dominant in 2021?” I asked.

“Two”, he said. “The big one is the recovery story. While it might not feel like it, all the news in early 2021 will be positive. A little gain here, an uptick there. Look at the way China is powering ahead with industrial production up 7 per cent against November last year, and exports are up 21.1 per cent in November to an all-time high.”

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It made sense. “So, the Chinese economy is showing the way?”

“It’s the ideal leading indicator. They were first into the virus, first to deal with it, first to see the impact on the economy of lockdown, first to relax the restrictions and first to see economic recovery. China’s economic figures will look good next year and the rest of the world will follow.

“If China starts having more debt defaults and growing unemployment, it will surely be seen with us shortly after. They are leading the cycle and the narratives, and everyone else will follow.

“The second dominant narrative is the vaccine. Continued good news can only help the bulls. If one vaccine doesn’t work, there are several others, using both the new mRNA and the old inactive virus technologies, so there is plenty of scope for diversity if one has severe side effects.”

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He paused long enough to take another wee nip from his flask. “Equities are the place to be in 2021, but be selective. Value stocks, emerging markets and small caps should recover as the money spreads out. And keep your technology investments, even if Europe, China and the US are considering breaking them up. Technology demergers always lead to more creativity in the long term.”

“There must be some downsides, the chance of an unknown unknown event to scare investors”, I said to dampen his enthusiasm. Santa snorted. “That happened this year with the coronavirus, and what happened? Policymakers debased the value of money by printing lots of it.

“That will eventually damage confidence in the value of money and lead to inflation, although not for some years yet. Inflation is good for shares – at least those companies who can keep raising prices. We can expect a lot more unemployment from those companies that can’t raise prices, and yet more government borrowing. The world will come out of Covid-19 a lot different place than when it started.”

“So what’s the future for Hong Kong’s in 2021?”

“Business confidence is fundamentally impaired by the drip, drip, drip of bad news. An arrest here, a frozen bank account there, a hotline buzzing with people snitching on their adversaries, airlines banned, beaches closed. It all adds to the uncertainty.”

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I agreed. “We need the bad news to come all at once so that we can move on.”

Santa’s brow furrowed. “The biggest irony is listening to rich businessmen asking for money to keep their companies afloat. Hong Kong has been good to them. The spirit of Christmas means that public money should go to the poorest and lowest-paid.”

Santa finished his hip flask, picked up his rucksack and started downhill. Looking into the distance at the sceptred isles in the sparkling sea, about to accept HK$1 trillion worth of dirty reclamation, he said, “Despite the virus, despite the politics, despite the capricious decisions, Hong Kong is still a great place to live!”

Richard Harris is chief executive of Port Shelter Investment and is a veteran investment manager, banker, writer and broadcaster and financial expert witness

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