What 2021 holds for equities will depend on the time of stimulus rollback: Jim O’Neill

What 2021 holds for equities will depend on the time of stimulus rollback: Jim O’Neill

NEW DELHI: British Economist Jim O’Neill says equity investors were very logical in 2020 in gauging the impact of the Covid pandemic, but warns that a strong recovery in economies could prompt central banks to roll back stimulus measures that can go against equities in 2021.

“Bitcoin and other cryptocurrencies are quite volatile,” Jim said, and added that he won’t recommend them to anyone.

In an interview with ETNOW, he said in March last year he had projected S&P500 at 4,000 P and today the index is not far off from that feat.

“It has not been a big surprise to me, but it doesn’t mean the rally will necessarily go on. Ironically, if we get a very strong economic recovery across the world, then central banks may start deciding by the middle of 2021 that they do not need the same scale of monetary accommodation, and that could be a problem for bond markets, which in turn could also easily turn out to be a problem for equity markets as well,” he said.

Jim O’Neill is a former chairman of Goldman Sachs Asset Management, former Treasury Minister of the UK and is at present the Chair of Chatham House.

Will the first half of 2021 be as good as the second half of 2020 for equities?

“It makes me nervous. Superficially, it seems so. But of course, a lot would depend on the ongoing speed of the market move. I was talking to somebody two weeks ago that I knew for 30 years, and I joked and said that I used to occasionally tell hedge fund managers that they should just trade in December and not the rest of the year, because trending markets tend to be powerful in December,” he said.

Jim said if one puts November and December figures together, the rally in the equity market has been extraordinary this time. At some point, whatever the underlying trend is, something will trigger a correction, he said.

Jim reminded investors of what is known as the 5-Day Rule, which says based on how the US’ S&P trades in the first five full trading days of a new calendar year, one can foresee what will happen to the market in the whole year.

“So, if it’s up over those first five days…” he said.

Ultimately, how markets perform might ultimately depend on whether inflation is as low as everybody presumes.

Jim says it is not necessarily the actual rates of economic performance that drive equity markets, but the perception of the economic performance and what it means for monetary and fiscal policy.

He called the equity market very logical in 2020, but said it is going to be very hard to get similar returns as was the case that equities have had in the past few years.

“This is a particularly good environment for the so-called emerging markets, and it has been the case for the past couple of months. It’s a good time to have greater allocation to them until the environment for monetary policy in the western world changes,” Jim said.

Jim, the economist who coined the term BRIC, said the US Fed’s accommodative stance is conducive for further decline in the dollar. That said, he does not think the dollar will be declining forever.

He said bitcoin and many other cryptocurrencies are just far too volatile for most investors. “I personally haven’t taken any exposure and don’t plan to, because if you pick a wrong day, this thing could fall 15 per cent in five minutes, and then you’d be regretting it,” he said.

“Of course after the rally we’ve seen, a 15 per cent decline is a lot more impactful than it would be three months ago. I often think about it as a very volatile version of gold. In some ways, it has the same qualities as gold, apart from the fact that you can’t hold physical gold bars. I look at it as a true alternative asset and certainly as a credible new form of currency. Bitcoin has a lot of things to prove itself before it becomes suitable for more conventional mode of investing,” he said.

Jim said the Biden administration in the US would want to restore the norms of international governance and international order, and that could partly be a reason why US stocks have seen an accelerated rally since November.

“Trump was essentially trying to go through things with a very bilateral approach and was almost willingly, deliberately, destroying some forms of the post-World War II international order. On US’ domestic policies, Biden is likely to increase corporate taxes and we have to see how it plays out for the equity market,” he said.

“Biden will probably be happy to preside over larger fiscal deficits, than we would have thought the Republicans would have done. What the US does in response to the ongoing pandemic and is probably going to be really important in terms of fiscal policy. By and large, in the last three to four months of market rally, the stock market is actually celebrating an end of the Trump regime and welcoming somebody who is a bit more normal for the world markets,” he said.

Jim said it is hard to see emerging markets rise significantly if the US market was to drop noticeably. What he finds feasible is that the US market could just be relatively flat and gyrates going forward, which may not be a barrier to emerging markets.

“That’s what I wouldn’t be surprised to see. To some degree, it also depends obviously on the dollar,” he said.

Jim said one needs to see different valuation techniques because of the uniqueness of the situation and obviously does need to take the interest rate levels into accounts.

“I keep on emphasizing if the monetary policy environment were to change, we could see a very different situation. If you look at more traditional valuation measures, say the Cape Ratio, where you take the cyclically adjusted price and earnings relative to the value of the market. I think that’s important to do. But if you do that, obviously you quickly come to the conclusion that US markets are very expensive. But if you discount the future with a belief that interest rates would stay at these levels for a long time, then you come to a very different conclusion,” he said.

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