US Congress passed a US$900bln COVID-19 spending package as part of a US$2.3trln spending bill and was signed into law by President Trump on 27 December 2020. Stimulus payments may help boost spending in January. Aside from fiscal issues, the first full week of January brings the Georgia Senate elections on 5 January 2021.
Separately, a long-awaited Brexit trade deal has been agreed. The UK and EU have confirmed the agreement of a “skinny free trade deal” on 24 December 2020 – this is set to govern trade between UK and its largest trading partner from 1 January 2021.
Whether upcoming political news causes markets to rise or fall, Citi analysts expect that the impact of government decisions could be priced in swiftly. Despite the suspense associated with global government actions, COVID-19’s eventual defeat could remain the major factor that drives investment returns in 2021-2022.
New COVID-19 variants and realities
Fears associated with a new COVID-19 variant spread globally as the UK announced more severe restrictions in an attempt to slow the spread of the disease in and around London. The appearance of new COVID-19 variants is expected – over time, mutations accumulate and lead to new variants as the virus adapts to the human immune system.
Major concerns remain about the rate of transmission however. The latest clinical advice is that it is highly unlikely that the new variant could fail to respond to a vaccine. Thus, to the extent these data remain consistent, Citi analysts do not see the increasing prevalence of the new mutation as a major impediment to economic recovery in 2021. That being said, there is a risk that a more significant variant of COVID-19 could appear and be less treatable with the present vaccine.
As China’s economy recovers, broader Asia could benefit
Citi analysts remain overweight global equities, REITs and underweight global fixed income. Uninterrupted gains are not expected in markets, however, Citi analysts see a long-term outperformance in Asia in particular. As the world’s second largest economy, China’s success is likely to directly impact the overall health of the global economy.
China’s exports have jumped 21% in November 2020 from a year ago. The country’s domestic economy also continues to recover, which could be meaningful to lift demand for exporters in the region. China’s imports are also likely to follow exports and boost regional growth. The improving prospects of vaccine rollout in Asia may also give rise to economies with most dependence on tourism and service industries in 2021, which have been laggards in 2020. This points mainly to Southeast Asia, which is likely to drive regional outperformance in 2021.