We expect global economic output and corporate earnings to reach pre-pandemic levels by the end of 2021, enabling economically sensitive markets and sectors to outperform. But accelerated change means it is also important to retain exposure to structural growth.
2020 is set to be among the worst years for the global economy in more than 70 years. We think China will be the only large economy to record any growth, and estimate the US economy will have shrunk by roughly 4%, with developed markets as a whole and emerging markets ex-China contracting by 5%–6%.
Overall earnings should return to pre-crisis levels in 2021
Forty-eight per cent of investors are very or somewhat optimistic about the outlook for the global economy over the next 12 months, but that figure rises to 66% on a five-year view.
But we expect 2021 to be a Year of Renewal. Economic activity in China has already largely normalised. And following encouraging early vaccine efficacy data, we remain confident that vaccines will be widely available by the second quarter of 2021. This should help put Europe and the US on the path to a sustained recovery.
If we are right, we expect corporate earnings to rebound quickly. We think developed market earnings will roughly match 2019 levels in 2021. Meanwhile, we anticipate emerging market companies will earn around 15% more in 2021 than in 2019, powered by robust earnings growth in Asia.
Revived economic and corporate earnings growth should also mean renewed outperformance from those cyclical companies and markets that underperformed in 2020. We see particular catch-up opportunity in small and mid-caps, select cyclicals, particularly in the industrial and consumer discretionary sectors, and in markets outside the US.
How will the world be different after the recovery?
The pandemic has made our world both more digital and more local, and not all companies and individuals will be able to adapt. So while we think that in the short term investors can profit by investing in companies exposed to a cyclical recovery, this needs to be combined with exposure to the disruptors set to drive technological transformation over the decade ahead, including 5G, fintech, healthtech, and greentech.