On December 10th and 11th, 2020, the Anfield Investment Committee gathered (virtually!) for the 2021 Annual Economic and Investment Forum in Newport Beach for part one of a four-part series in evaluating what we believe 2021 may hold for investors.
This year’s Forum featured an impressive line-up of external speakers. Many thanks again for their participation and valuable insights:
Gary Schlossberg, Global Strategist and Economist at Wells Fargo Investment Institute
Jeffrey Cleveland, Chief Economist at Payden & Rygel
Iman Movahed, Senior Portfolio Manager and Co-Director of Research at Affinity Investment Advisors
Michael Torres, Chief Executive Officer and Portfolio Manager at Adelante Capital Management
Glenn Reynolds, CEO and Co-Founder of CreditSights
Jason Hsu, Founder, Chairman and Chief Investment Officer at Rayliant Global Advisors
In addition, we heard topical presentations from the following members of the Anfield Investment Committee:
Kevin Vanderbilt, Portfolio Strategist: U.S. Political Landscape
Cameron Baxter, Associate Portfolio Manager: U.S. Political Landscape
Jake Carnegie, Investment Analyst: U.S Consumer
Peter Van de Zilver, CFA, Head of PM Analytics and Risk Management: Fat Tails & Assessing Risk
One Year From Now: What Do We Think We Will Be Talking About?
1. Effectiveness of COVID-19 Vaccines and their Adoption
The general population will have access to, at minimum, two vaccines (Pfizer/Moderna) with 90%+ efficacy. As we progress through Q1, two more companies will be submitting their vaccines for approval—AstraZeneca and Johnson & Johnson. Both vaccines differ significantly from those currently approved. The former looks to have a lower efficacy rating and has been mired with some trial issues, while the latter is a more typical vaccine and could be administered in a single dose. The efficacy the AstraZeneca vaccine is about 70% according to a November press release from the company, while the efficacy of the Johnson & Johnson vaccine has yet to be determined. Additional vaccines look to come online during the course of 2021.
Potential Wildcards:
Will these get approved and add to the current stockpile?
What will the logistical challenges of distribution be?
What will the side-effects be?
Will the public embrace and receive the vaccine?
Sources: Company Websites, Bloomberg, WSJ
2. Polarized Government
With a potential split-Congress and Democratic presidency, the beginnings of the Biden-era look to be rife with political conflict. COVID relief and stimulus looks to be the first priority of the new administration, and as of the date of this publication there appears to be a new deal. That could be followed by an effort to strike a bipartisan deal on infrastructure; with “blue” states yearning for funds to repair mass transit, and “red” states looking for improvement on rural roads and broadband, there could be middle ground to make progress where each side can walk away with a win.
Potential Wildcards:
How well will President Biden and Senate Majority Leader McConnell work together? (assuming a split-Congress)
Where can there be compromise beyond COVID relief and infrastructure?
Could there be a delay in governance due to Cabinet-appointee hearings if a Republican-led Senate refuses to approve Biden’s picks?
How different does Biden govern if the Democrats win the Georgia run-offs in January?
3. Will the Consumer Recovery Fully from 2020?
The U.S. Consumer makes up approximately 70% of U.S. GDP, and due to the impacts of COVID over the course of 2020, seem to be struggling. According the U.S Census Bureau, in a survey of 50MM+ people, nearly 30% said they have little or no confidence they will be able to pay next month’s rent. The U.S. Consumer significantly increased their saving early in the year with the onset of the CARES Act in concert with other programs which directly supported them. As the year progressed, spending increased (see Chart A) but there are growing concerns through the holiday season, where many businesses rely to make their bottom line. There are glimmers of hope as longer-term travel and vacation reservations seem to be on the rise as news of the vaccine(s) and their implementation continue
Potential Wildcards
Does the consumer spend money this holiday season as they have in the past?
Will the new stimulus passed by Congress be enough to satisfy the markets and the general public?
How do industries such as restaurants and other small businesses rebound, if at all?
Do the large, big-box shops dominate the marketplace going forward more than they have in the past and what does that mean for small business lead job creation?
Sources: U.S. Census Bureau, Payden & Rygel, St. Louis Fed
4. Explosion of Debt
As of this writing, the U.S. National Debt stands at more than $27T, having increased by nearly $5T over the past year. Considering each year since 2014 has increased by approximately $1T, the most recent rise is significant (see Chart B). Corporate debt is following suit as companies continue to withstand the liquidity crunch of the pandemic by issuing record amounts of debt (see Chart C). With interest rates at record lows and no end in sight, along with further government aid en route to the American’s pockets, the direction of this only seems to be going one way: Up.
Potential Wildcards
How does this impact the economy at large?
Interest rates have been trending to zero for decades, when does this end?
Do conservatives in Congress make spending a priority within their platform?
Does the government lean into the cheap money and use to spend, spend, spend?
Sources: Visual Capitalist, St. Louis Fed
5. The Beginning of the End for Dollar Dominance?
The United States has benefited from the world being denominated economically speaking in U.S. dollars. Other areas have tried (re: Euro) but failed to grab a meaningful share of the currency pie. As the Chinese economy increases, it stands to reason that they will challenge the U.S. on the currency front. Additionally, there has been more mainstream
acceptance of cryptocurrencies with Blackrock, Guggenheim Partners and Goldman Sachs (amongst others) all speaking positively about prospects for growth in this arena.
Potential Wildcards
What steps does China take to impact the dollar (for better or worse)?
Do regulators take a more active interest in Bitcoin and other cryptocurrencies?
Do these and other forces (U.S. debt) combine to undermine the U.S. Dollar’s global dominance?
Sources: Marketwatch.com, CNBC.com, Bloomberg.com
6. Inflation: No Effect or Dominate Discussion?
Each year we seem to always land on Inflation as being an issue to watch for the coming year. As you can see from the chart below (see Chart D), we’ve seen costs increase in many areas while wages stay the same. Of those presenters this year where inflation was discussed, it was split as to whether or not we would see its ugly head reared during 2021. However, no one—neither our presenters nor our internal team—could pinpoint the source(s).
Potential Wildcards
What are the “sparks” that could take place that lead to inflation?
How does the market react if it gets a sniff that we are in an inflationary environment?
Is some inflation good? One person’s price increase is another person’s revenue increase!
As mentioned in the introduction, Themes and Wildcards are only Part I of a 4-part process. The next component will be our annual macro-economic forecast which is underway now and will be distributed soon.
Until then, Happy Holidays and best wishes for 2021 from the team at Anfield!