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As stock markets ring out 2020, here’s the most underappreciated risk to their stability in 2021
- If investors’ confidence in central banks is shaken before mass vaccination programmes are in full swing and the recovery gains momentum, sentiment could deteriorate quite sharply
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Much has been written this year about the striking disconnect between Wall Street and Main Street. Despite the economic devastation wrought by Covid-19, and the fierce resurgence of the virus in Europe and the United States over the past few months, stock markets are ending 2020 in an ebullient mood, suggesting that the deepest recession in a century never occurred.
Yet, just as remarkable is the consensus about the direction of markets. Although the global recovery is sputtering, and most major asset classes are already priced for perfection, investors are convinced that riskier assets – stocks, corporate debt and emerging markets – will continue to perform well in 2021.
Such bullishness is all the more striking given the degree to which it hinges on benchmark bond yields remaining at ultra-low levels despite the much-anticipated acceleration in economic activity stemming from the mass roll-out of immunisation programmes.
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If vaccines are the silver bullet that puts an end to the pandemic and speeds up the recovery, then it stands to reason that bond yields will rise, possibly quite sharply.
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China’s Sinovac Covid-19 vaccine proves more than 50 per cent effective in Brazil trials
China’s Sinovac Covid-19 vaccine proves more than 50 per cent effective in Brazil trials
Indeed, one of the most talked-about risks for 2021 is a stronger-than-expected pickup in inflation, fuelled by unprecedented levels of monetary and fiscal stimulus, the forces of deglobalisation and, crucially, the release of pent-up demand once vaccines are widely distributed.
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