Lower Base Effects Will Be A Tailwind For Growth In 2021

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All major indices gained during the past week as investors focused on the gradual reopening of economies and the fiscal and monetary stimulus measures. Within the S&P500, the cyclical segment led with the technology sector gaining most as shares of Apple rose; small capitalisation indices also rebounded but the Utilities and Real Estate sectors lagged. Long term US bond yields increased by 10 basis points after the Treasury announced it will borrow a record USD 2.99 trillion during quarter 2. This represents nearly 1.5% of GDP but the Eurodollar rate remained rangebound within 1.08 to 1.10.


The European Commission announced that GDP for the Eurozone would contract by 7.75% this year and would rebound by 6.25% next year. They estimate that risks remain tilted to the downside on account of the uncertain medical situation. The high US unemployment level of 14.7% is being interpreted as temporary as a vast majority of respondents of a survey said they expect to be rehired within six months. This tallies with most estimates that global growth will rebound as aggregate demand picks up in the second half of the year.


The critical 12 month forward PE ratio for the S&P500 is 20.4, its highest level since 2002 (detailed sector chart above). The calendar year 2020 bottom up estimates by Factset as of last Friday is a contraction of 20%. The downgrade cycle is not yet over as the second
quarter contraction will reduce earnings further.  However the base effect for 2021 will be a strong tailwind and can cause a fall in the elevated 12 month forward PE ratio and support higher equity indices.

On the asset class side, large cap equities and investment grade credit remain favoured for now. But a rotation into cyclical, European stocks and Japan would be an indication that the market is ready for the next leg higher.

PWM Wealth is a boutique wealth management company in South Africa providing bespoke investment services to affluent individuals

We provide independent, expert advice on local and offshore investment funds, portfolios and structures. We have access to a vast, customizable range of investment options from across the global market. As a result clients benefit by receiving the most appropriate advice and solutions for their varying and specific needs. Our business operates within a highly regulated environment therefore ensuring that the highest professional standards are maintained while keeping the best interests of our clients in mind. For this reason systems have been put in place to ensure full compliance with all regulatory requirements.

11 May 2020

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