Understanding the stock market is a complicated feat. There are expectations combined with plausible outcomes. So we carried out an interview with Giles Coghlan, Chief Currency Analyst at HYCM, to discuss the best performing stocks and how investors should plan their portfolios. This year, stock markets around the world have cooled after the contagion effects of the coronavirus pandemic. On January 1, investor sentiment was riding high on the optimism of vaccine rollouts, which caused global stock markets to hit record highs, a big opening for 2021. The Chinese yuan had risen 1 percent against the dollar, while the greenback plunged to its lowest levels against a basket of peer currencies. The greenback’s plunge to those low levels was recorded for the first time since April 2018. It is observed that even European stocks opened higher for 2021.
In Asia, the stock markets recorded gains too. However, the 0.4 percent drop in Japan’s Nikkei 225 index can be treated as an isolated incident following Prime Minister Yoshihide Suga’s confirmation of the government considering to issue an emergency for Tokyo and three close by districts to contain the infection spread. On the bright side, the Tokyo stock exchange reached record highs in February, for the first time since August 1990. This proves that investor sentiment has drastically improved against the global situation over the last few months. In the first fifteen minutes of trading, the stock average on the Nikkei index rose 339.93 points and stood at 29,119.12.. That said, the Tokyo Stock Price Index 22.96 points on the same day, leading up to 1,913.91.
Although trying to predict the future performance of stocks in the context of the pandemic seems challenging, one plausible scenario is that inflation could rise modestly over the next 12 to 18 months to below 2 percent in the United States and nearly 1 percent in Europe. This implies that ‘policy rates will remain anchored’ and investors should be more cautious about holding excess cash. Another factor that could play a significant role in the stock market performance is the US-China trade war that is here to stay. Despite the new Biden administration, it is reported that the trade relations between the two superpowers are not likely to experience much improvement following the tit-for-tat tariff hikes.
For emerging markets, policy revolution might remain in place despite the possibility of inflation rise. Morgan Stanley expressed that globally there are many ‘buying opportunities in banks as they benefit immensely from reopenings as vaccines are distributed through 2021’.
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Are the rapid gains in global stock markets based on optimism that vaccines will help the world return to normal?
This is definitely part of the reason why we are seeing the major markets make positive gains in the opening stages of the year. Alongside the vaccination programme the main reasons for stock market gains are low interest rates from central banks, large levels of government support via fiscal stimulus and anticipation of a swift economic recovery across major countries. 2020 was a volatile year and this had to do with the general uncertainty that investors faced. Not only was there Covid-19; there was also a US presidential election and the UK’s scheduled departure from the EU. These are significant events by themselves, and with both of them now resolved for the most part, investors now have a better handle on what the coming months could bring.
If the vaccine rollout successfully continues, I’d like to think that the optimism currently on display will only grow as lockdown restrictions are slowly lifted. But we need to be realistic about this – I imagine we will not be in a position to confidently declare that the pandemic is on the verge of coming to an end until the latter stages of this year. So, the risk is that a vaccine resistant variant sends stocks lower again. It is a key theme I will be keeping our clients aware of.
It is reported that strategists say the market valuations are distorted and that we are likely to see a pullback in 2021. How did the global stock market perform in 2020 and can we expect a record-fast recovery of the stock market in 2021?
It is indeed an interesting point. All assets and markets are in a strong position at the moment, be it the Dow Jones, Nasdaq, or the Dax. We are even seeing rapidly rising interest in cryptocurrencies like Bitcoin. Naturally, there are concerns this cannot last and that we could even be in a bubble that is being enlarged by overvaluations and volatile market movements.
We all know that growth in the financial markets is by no means linear, but rather a series of peaks and troughs. On that basis, we could see a sudden retraction in prices as the market adjusts to new conditions. We also need to remember that there are big questions about public debt in the UK and the US, and how both countries will be now tasked with overcoming the economic disruption caused by Covid-19. While I do think the stock market will be in a stronger position come the end of the year, the reality is that the economic recovery from Covid-19 may take time. While there is good reason for investors and traders to be optimistic, they should also be cautious and realistic and expect pullbacks. From my standpoint the first test will come when the Federal Reserve considers raising interest rates. This will likely result in a re-pricing of stocks as the easier monetary conditions begin to fade.
Which of the Southeast Asian stock markets rallied in the fourth quarter of 2020 to crack into the bull market territory and what were the contributing factors to their stock surge?
Emerging markets have been rallying strongly on the so-called reflation trade, and this is part of a coordinated global recovery. On this basis, the Southeast Asian stock markets have been rallying. What’s more, the MSCI Asia Pacific Index surged last year to outperform the US. A strong economic rebound in China and Asia’s low valuations relative to the US and Europe are key positives that will likely support the ongoing surge in activities across the Asia Pacific.
Were Chinese financial stocks some of the best performers in Hong Kong and Shanghai in the midst of the peak pandemic? If so, why?
Some of the best performing Chinese stocks were a mixture of energy and technology stocks. The ‘stay at home’ nature of 2020, induced by Covid-19 lockdowns, naturally helped demand for tech stocks. Future FinTech Group Inc grew by 317.18 percent and Renesola, a solar energy company, brought in a massive 704.30 percent return. As well as these outstanding returns, well-known consumer companies like JD.com and Alibaba also made excellent gains. Alibaba has made a 21.46 percent change and JD.com has seen a stunning 134.66 percent change.
What is the current state of stock market activity in the UAE and how is the foreign and local investor sentiment in the market?
Like other major indices the Dubai Financial Markets index has seen a recovery from April 2020 lows. However, the market closed -9.87 percent on the year in 2020. This year looks more promising as the UAE is showing excellent speed in vaccinating its population with one of the world’s fastest programs. It has been a very good start to the year for the DFM index and the price currently sits at 2594, which is a 3.04 percent rise for the year. The Abu Dhabi Securities Exchange has shown a very similar pattern to Dubai Financial Markets. On top of this, vaccine optimism and rising oil prices are contributing to the rise of positive investor sentiment.
Which of the GCC stock markets are expected to perform well in 2021? Why?
In 2020 Saudi Arabia and Qatar were the best performing regional markets. Qatar for instance has been able to establish a buffer of around 165 percent of its GDP, pointing to $320 billion, so it was able to attract defensive inflows. However, in terms of 2021 the UAE markets are well poised for recovery with Dubai’s economy being driven by tourism, hospitality and trade.
The UAE were hit hard by the pandemic, but I believe it should do very well as vaccinations continue and people are able to start travelling again. It is certainly one market to watch. Furthermore, with many expats leaving property in Dubai, we could see a large influx of people returning once the pandemic is brought under greater control.
Is the global stock market due for a correction and how should investors plan their portfolios?
At the moment, it is difficult to tell. Markets can trade ‘overvalued’ for months and even years. I anticipate that the pace of growth will presumably slow down in the coming months. There is plenty of speculation at the moment, which is why it is important for investors to do their research when it comes to planning future portfolio movements.
Investors are also still taking a cautious approach, reducing their risk exposure to assets that are subject to sudden price corrections. Recent research commissioned by HYCM revealed that cash savings remains the most popular asset class among UK investors at the beginning of 2021.
What this demonstrates is that while fiscal and monetary stimulus have been positively received by the market, investors are still treading carefully. Cash remains king, and this is despite interest rates in the UK hovering just about zero percent. The big question now is what kind of assurances investors will need to look beyond cash savings. Should the vaccine rollout and current lockdown successfully curb Covid-19 cases, I’d expect more investors to start moving some of their cash into other assets.