Happy New Year!
As many investors scramble to find the new thematic and dynamics that markets will bring following the US election, many may find themselves thinking too hard. With systemic risks that are weighing on price discovery, such as rising COVID cases across the globe, deflationary risks (as we warned you about in: https://gumbeauxcapital.com/growing-deflationary-risks-within-the-economy/ ), insolvency risks, and the impending global currency crisis due to aggregate scale QE (Quantitative Easing) programs and facilities, risk based markets (Stocks, Real Estate, Commodities) will be drawn out of the high liquidity environments we saw in Q2 2020 all the way through Q4 2020.
Money Markets
As central banks across the globe are heading towards more dovish policies, cash will become increasingly liquidity friendly due to the decreased propensity for “market makers” to seek an increased risk appetite while attempting to mitigate the unique systemic risks derived from the COVID-19 outbreak. Subsequently there will be a large shift in liquidity into “safe haven/risk-off” assets such as cash. Unlike many recessions that see a large shift towards fiscal policy utilization; due to the effects that the globally, inadvertently, and “semi-obligated”, aligned monetary policy that global central banks created… the highly sought after Gold positioning (which is usually seen as a hedge against inflation by investors) will not be as fundamentally suited to drive in desired returns due to the deflationary monetary environment, and dynamics that will be carrying implications into markets heading into the 1st half (H1) of 2021. Debt markets will also feel the same liquidity crunch due to the ULRIP (Ultra-Low Interest Rate Policy) environment that is rampant across the globe. ULRIP (and in some cases NIRP) decreases the aggregate propensity to invest in bond & debt markets as a whole which can pose liquidity risks. Nonetheless, debt markets will be suited to carry more attractiveness than it has over the course of 2020 due to the inevitable (beginning of) the end of the yield curve manipulation, repurchase agreements, and the inevitable increased federal spending paired with fiscal policy on a global scale. Debt markets will continue to offer relatively low yields, and will be exposed to risks of a possible liquidity crunch due to the ULRIP (Ultra-Low Interest Rate Policy) environment that is rampant across the globe, but like stated, will experience a “better” dynamic in 2021.
Look for the “Safe-Haven” currencies (USD,JPY,EUR,) to enjoy increased levels of liquidity as the rush towards growth based, and EEM (Emerging Markets) currencies may falter due to the impending sobering outlooks on aggregate sustained growth. Subsequently, we may see commodity-linked currencies (CAD, AUD, NZD) have a mixed year whereas deflation risks (further explained in: https://gumbeauxcapital.com/growing-deflationary-risks-within-the-economy/) continue to linger. Now H2 2021 may offer an interesting inflation dynamic, but will be dependent on consumption and economic expenditure in H1 2021.
But what about the risk assets?
With risk appetite looking to vacillate, the best risk based investments should carry a strict criteria for investors. Investors should prioritize liquidity and cash flow, product elasticity, and social sustainability. Even though this criteria is used in “risk-on” environments, the margin of error is tightening. Ample capex will be a key for the best equity based investments as demand for products and services continue to “tend to its wounds”. Lack of volume may be a risk to bullish price action, due to the impending institutional rotation out of high yield, and aggressive growth sentiment exposure. Investors should also use financial liquidity measurements (more than usual) to hedge against the growing trend of insolvency. As cliche as it sounds… low-beta, “value”, and specialization based equities look to be the winners of 2021.
Moral of The Story ?
The biggest catalysts for investment performance going into 2021 will simply be, solvency, product inelasticity, dynamism, and sustainability.
