Economy and markets in 2021: Between recovery and rising interest rates

Although the global economy is still suffering from the consequences of the lockdown, the capital markets are already firmly expecting the pandemic to be overcome in the course of 2021. Improved corporate earnings prospects and the support of an unchanged expansionary monetary policy are the main reasons for optimism. Recently, however, there have been increasing signs of exaggerations on the equity markets. The significant rise in interest rates, particularly in the USA, ultimately caused growing uncertainty. "The recent price corrections are a clear warning signal. Despite a positive long-term outlook, the risk of short- to medium-term setbacks on the stock markets has risen sharply," said Dr. Heinz-Werner Rapp, member of the Management Board and Chief Investment Officer of FERI, at the digital annual press conference in Frankfurt. The further development depends decisively on how much interest rate increase the stock market can tolerate.

Inflation fears increasingly justified

The global economy will continue the recovery that began a year ago in the course of this year. There are likely to be major differences between the individual regions: So far, China has led the way in growth. In the first half of the year, the US could take the lead, after which Europe should also catch up significantly. In the US, the massive fiscal stimulus is expected to provide a significant boost to growth. "When private consumption in the US picks up in the coming months, it will encounter limited capacity because many companies have not yet recovered sufficiently from the Corona crisis or have had to give up altogether. Rising prices are then very likely. This is already starting to become visible," said Axel D. Angermann, Chief Economist of the FERI Group. A strong increase in inflation is still prevented by the subdued price development in the service sector. But that could change in the foreseeable future. "Inflation expectations on the capital markets have already risen, and the yield curve is now also showing a much steeper course than before the pandemic," Angermann explained.

Bond markets remain weak

The prospect of rising inflation rates is putting pressure on the bond markets in particular. In particular, further price losses are to be expected for government bonds. On the one hand, equity markets continue to benefit from a favourable fundamental and monetary policy environment, but could become increasingly defensive as interest rates continue to rise. Against this backdrop, a fragile "risk on" scenario is to be expected in the coming months. The market environment for risk assets such as equities and commodities remains fundamentally positive, but stronger management within the individual investment segments is crucial for investment success. In this environment, cyclical equities are clearly to be preferred over growth stocks; the technology sector in particular could correct significantly.