Governments and central banks remain in unprecedented territory as part of the effort to control COVID-19, while ongoing political uncertainty in the United States offers up opportunities and challenges for investors. Risks to recovery are still tilted to the downside, but we look toward 2021 with cautious optimism, following an extraordinary period for global financial markets.

Volatility is Likely and Inflation is Possible

We expect both monetary and fiscal stimulus measures to continue deep into 2021, but we do not have much clarity about the pace of the global economic recovery. The speed at which governments can overcome the COVID-19 pandemic, alongside the efficacy of vaccines, will dictate how stimulus is implemented and when the pivot away from current levels of support will come.

Commitment from central banks and governments is still unquestioned at this point, but the outlook is not as transparent as we would like it to be. The concept of “lower for longer” interest rates is well-established and should remain in place throughout 2021, although the approach major central banks will take toward broader quantitative easing is more difficult to predict. For example, there is an argument to suggest that the unprecedented support for “fallen angels” (i.e., companies previously rated as investment grade that have been downgraded to high yield) will cease as the recovery gathers pace. This was a powerful and unusual measure taken to prevent the dislocation of the global economy and cannot be guaranteed to remain in place. Insufficient stimulus could potentially increase volatility within markets as corporate defaults multiply and asset prices begin to lose value on falling demand and deteriorating market sentiment.

Despite the best efforts of policymakers, we believe inflation expectations will remain subdued across developed markets throughout 2021 and are unlikely to increase much until 2022 at the earliest, as economic weakness and high unemployment continue to balance the effect of stimulus. There is, however, a scenario in which central banks and governments remain cautious in the face of a surprisingly sharp economic recovery, maintaining stimulus beyond the point that economic indicators would deem necessary, scarred by the damage incurred in 2020.