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Global equity markets are not expected to outdo their 2020 performance as higher valuations force investors around the world to remain cautious.
There is a “disconnect between the financial markets and real economies”, Yasir Al Rumayyan, governor of Saudi Arabia’s Public Investment Fund, told a panel during the fourth Future Investment Initiative conference yesterday.
The surprising rise of the equity markets towards the end of last year “created in my mind some kind of inequality between the people with funds and money waiting on the sidelines and the real working class”, he said.
US equity markets ended their longest bull-run in March last year when the benchmark S&P 500 Index and the Dow Jones Industrial Average fell into bear territory as the Covid-19 pandemic gripped North America, Europe and Asia.
Subsequent lockdowns to curb the spread of the pandemic wiped out more than $20 trillion from financial markets worldwide.
However, governments and central banks unveiled fiscal and monetary packages worth more than $13tn to bolster economies in the latter part of last year and this propelled global equities back to record highs.
The panel said sectors that had underperformed during the pandemic are also expected to bounce back amid a broader economic recovery this year.
Earnings growth over the next few quarters is expected to underpin the long-term prospects of global equity markets.
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Markets have rallied on vaccine breakthroughs despite the pandemic tipping the global economy into its worst recession in more than 90 years and hundreds of millions of job losses in the travel, tourism and construction sectors.
The virus had infected more than 101 million people and killed more than 2.17 million as of Wednesday, according to Worldometer.
The International Monetary Fund raised its growth estimate for the global economy this year to 5.5 per cent as countries distribute Covid-19 vaccines and developed nations provide additional stimulus to protect their economies.
In its latest update to its World Economic Outlook released this week, the Washington-based lender kept its 2022 growth forecast unchanged at 4.2 per cent.
The abundance of liquidity in the market has changed the financial landscape across the globe, said Ray Dalio, co-chairman of hedge fund Bridgewater Associates.
The changing dynamics have created a lot of credit in the market, widening governments’ fiscal deficits, and brought real interest rates to minus 1 per cent.
Prices of assets have gone down along with the US currency while stocks and bonds have gone up.
“I don’t think it will be as good a year,” said Mr Dalio. "I think this will be a challenging year. I will encourage investors to pay attention to the supply and demand of the money and credit and the values of money and credit [this year].”
Larry Fink, chief executive of BlackRock, which manages about $7.8 trillion in assets, said “investors have spoken loudly”. He said he saw long-term value in the market.
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The market itself “will be closer to flat, may be a little down or may be a little up”, but the broader economy is set to recover generally, he said.
“I think 2021 will be quite good for long-term investors,” he said.
Rising valuations, earnings growth and a bounce-back in some of the sectors that did not perform well last year means the market might do all right in 2021, said Thomas Gottstein, chief executive officer of Credit Suisse.
“Our house view remains constructive on equities”, given the low interest-rate environment, he said.