A recent McKinsey report discussed “pandemic fatigue.” Although the report was about people feeling burned out with reduced social interactions and little reason to cheer, a similar sentiment enveloped businesses, economies, and global financial markets through most of 2020. Before we could bat our eyelids, a global health crisis turned into an economic crisis, bringing the global economy to its knees. A report published by Research Gate mentions two main reasons for this. First, the closure of businesses due to social distancing measures to curb the spread of covid-19 and, second, the heightened uncertainty that caused a “flight to safety” in consumption and investment.
All this may soon be in the rearview mirror. It’s not the holiday season that has lifted spirits this year. Hope has come in the form of covid-19 vaccines. The UK was the first country to approve a covid-19 vaccine that has proved its efficacy in a large clinical trial and commenced mass inoculation. Although there are still some concerns around the Pfizer-BioNTech vaccine, the US joined the UK in granting it emergency use authorization. Vaccines from Moderna and AstraZeneca are also showing great promise and it may be only a matter of months before businesses and economies worldwide recuperate and reach pre-pandemic levels.
This may be a great time to check your trading or investment portfolio to ensure you have some interesting plays on the global economic recovery.
What to Invest In to Prepare for a Global Economic Rebound?
Here are a few asset classes that traders should consider as part of their arsenal for a rebound in the global economy.
The Forex Market
Any forex discussion is incomplete without talking about the EUR/USD. This is by far the most traded pair and, therefore, has the highest liquidity and lowest spread. As economies begin to emerge from pandemic-induced pressures, improving risk appetite is likely to cause the US dollar to gradually decline. The launch of a fresh stimulus package, which injects money supply, will also exert pressure on the greenback. On the other hand, the EU’s progress towards a more integrated economic and political entity will continue to support the euro.
The EU’s moves toward deeper convergence will also play a key role in the EUR/GBP pair. Meanwhile, on January 1, the Brexit transition period will end, forging the way for a new relationship between the EU and the UK, with or without a deal. In the event that an agreement is not reached, the GBP could face immense selling pressure, as the UK settles into the new phase.
The GBP/USD has always been an interesting currency pair for experienced traders, with large movements offering attractive trading opportunities. The volatility is unlikely to ease in 2021 and traders need to be prepared with thorough analysis and risk management strategies.
It will be interesting to see how the USD/JPY moves next year, as both are safe-havens currencies. Although the Japanese yen may face selling pressure versus other currencies, it is expected to rise against the US dollar. The pair, which was trading north of 111.00 earlier this year, could fall below 99.00 by yearend 2021 and just shy of 95.00 by the end of 2022, according to LongForecast.com.
Traders may wish to gain exposure to emerging economies, as these are expected to drive growth initially in the post-pandemic world. Singapore dollar, Mexican peso, Hong Kong dollar, South African rand and Thai baht could be interesting currencies to consider.
While trading forex, keep monitoring these four data releases:
- Interest rate
- Inflation rate
- GDP growth
Not the absolute figures, but their performance versus expectations are likely to be even more significant market movers in forex.
These instruments are an efficient way of gaining exposure to the highly dynamic stock markets as well as to various regions. Even during the pandemic, while individual stocks surged and plummeted amid heightened uncertainties, stock indices rose over time. The Dow 30 has gained 5.4% year to date, while the wider S&P 500 has surged almost 14%. The tech-heavy Nasdaq 100 skyrocketed almost 40%. Even looking at the most volatile Asian markets, Japan’s Nikkei 225 has added 13% year to date, while the Asia Dow has gained almost 7%.
These indices may spike again, driven by optimism around a global economic rebound. In fact, JP Morgan projects the S&P 500 to surge 26% by yearend 2021. On the other hand, there may well be a correction and going short of these could prove to be a more prudent trading strategy. Using digital options, traders can speculate on two possible results and earn a fixed payout if your prediction is correct, without actually buying the underlying asset.
What is interesting to note is that the European indices are much more reflective of the pandemic-related challenges. The wider STOXX Europe 600 Index has lost almost 6% year to date, while the CAC 40 is down more than 7%. At the same time, the EU has robust plans for recovery. The European Commission has already approved a recovery fund of €750 billion, as well as targeted reinforcements to a long-term budget for 2021-2027. This may be the right time to gain exposure to a recovery in the EU economy.
Similarly, the Australian benchmark index is also in the negative year to date and the country has a budget of $98 billion, both in direct response measures and new job creation. Australia is also a commodity-based economy and the index may be a good way to gain indirect exposure to a recovery in commodities.
Oil prospects will improve steadily as the pandemic eases and economic activities, including travel, begin returning to normal. The EIA (Energy Information Administration) expects the benchmark Brent crude oil prices to average $49.53 per barrel in 2021. Precious metals, like gold, silver, palladium, and platinum, may experience some selling pressure due to a recovery in risk appetite. However, experts expect them to rise in 2021 as investors replace US dollars as their safe-haven option to hedge risks.
What is for sure is that traders and investors will be at least as active in 2021 as they were this year. What are your predictions for the coming year?
The contents of this article do not constitute trading advice and should be treated as general information only.
Please trade responsibly. For more information about responsible trading please visit: https://www.begambleaware.org
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