The extreme volatility of 2020 as markets grappled with the COVID-19 pandemic sent global indices on a turbulent path, but a few key narratives stand out and could carry into 2021.
“As 2020 ends and 2021 begins, there are three trends that are particularly worth watching, especially as they are interlinked,” said Russ Mould, investment director at AJ Bell.
“Spotting whether they will continue or reverse could have a huge influence on portfolio performance in the coming 12 months and beyond, as they could shape asset allocation, fund selection and – for those intrepid enough to try – individual stock picks.”
Will the US dollar keep falling?
The greenback has had a hard year, trading at almost three-year lows on Thursday.
There are multiple reasons for this, said Mould, including investors feeling “less need to own a perceived haven asset such as the greenback, amid hopes that vaccination programmes will beat off the pandemic and help economic activity start to return to normal in 2021.”
There is also little sign of US money supply running out, as the US and its major peers — such as the UK, EU and Japan — are running quantitative easing programmes at “record highs” he said.
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“Not one of the ECB, Bank of Japan, Fed or Bank of England is now pretending that QE is a temporary or emergency measure and not one of them is talking about sterilising or withdrawing QE,” said Mould. “The only game in town, at the moment, seems to be how far they will go. That may also explain why asset prices remain so elevated across the board and why some commentators think that markets will remain bubbly for some time to come, given the old adage that financial bubbles only burst when the money runs out – and there’s little sign of that right now.”
Will commodity prices keep rising?
As the dollar slides, a historic inverse relationship arises with emerging market equities and commodities. On the latter, they can benefit from a decline in dollar as most are priced in dollars, so a drop makes them cheaper to buy for nations whose own currencies are not linked in some way to the American currency, thus boosting demand, said Mould.
“Commodity strength may also coincide with dollar weakness as a reflection of robust global economic health,” he added.
On Thursday, the US dollar was trading lower against major currencies, allowing them to trace gains against the greenback as investors saw a robust global recovery coming as the cheaper, more easily transportable Oxford/AstraZeneca (AZN.L) vaccine was rolled out.
Will Bitcoin and gold keep rising?
Gold has reached a new all-time high in 2020 and Bitcoin (BTC-USD) hit another record earlier on Wednesday, surging to $28,500 (£21,086), quadrupling its value this year.
“Some will argue that there is more to come from both gold and bitcoin, especially if Governments keep piling up debts and central banks do their best to fund that borrowing through the backdoor with QE, zero interest rates and bond yield manipulation, thanks to their scarcity value relative to cash,” said Mould. “Bitcoin’s supply is fixed at 21 million units and gold supply grows at barely 2% a year, as the metal is hard to find and expensive to mine.”
What investors should focus on in 2021, he added, is to get “their chance to pay their money and take their choice as to whether they see bitcoin and gold as stores of value, and useful portfolio diversifiers, as governments and central banks conjure money out of thin air, or more trouble than whatever they may (or may not) be worth.”
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