Relative to other global institutions, financial markets performed remarkably well in 2020 and investors ought not to be ashamed of their reactions relative to consumers. It would be a terrible abuse of language to characterize 2020 as being financially irrational. The Covid crisis in 2020 was one of the most orderly crises ever. The damage and the reward across companies, sectors, and countries made a lot of sense. Although there are pockets of extremely high valuations in the tech sector, humility has always been a virtue when it came to valuing tech firms. While stocks are very expensive in absolute terms especially in the US, they are not relative to governmental bonds. But there is a big caveat to all this: the rise in the monetary supply since 2010 has been so incredible that markets have dived deep in unchartered waters. Central banks must find our way back to homeland.
The macroeconomic policy revolution accelerated by Covid-19 implies that central bank policy rates and nominal bonds yields will be less responsive to rising inflation pressures over the medium-term. The potential for higher consumer price inflation over the medium-term is still underappreciated, we think, because the new central bank policy frameworks and global cost pressures are not fully reflected in private sector inflation expectations. Neither is the shift towards a closer coordination between monetary and fiscal policy. Combined with the fact that bond yields remain close to their effective lower bound and that authorities need to rely to a greater extent on fiscal policy, the role of government bonds in investment portfolios as a hedge against risk-off events such as the one in March 2020 is increasingly challenged. In contrast to past inflation episodes, less-responsive nominal interest rates and bonds yields mean that government bonds are also becoming less effective as store of value.
The Covid-19 vaccine will supercharge global growth in 2021, but short-term headwinds, and a complete recovery only by 2022, will create transition risks.
In mid-2021, despite the sizeable hurdles on the demand (vaccination skepticism) and supply sides (production & distribution bottlenecks), we expect the vaccination of vulnerable populations (20-40% of the total) to be completed, setting the stage for a buoyant growth rally in H2 2021.
Policymakers will particularly be under scrutiny, as they will continue to run the show again in 2021-22.
In the real economy, cyclical sectors (including energy, metals, and automotive) to see strong catch-up growth as soon as Q2 2021 as the recovery starts to unfold and economic uncertainty recedes.
Deux fois par an, la Fédération des entreprises de Belgique (FEB) interroge ses fédérations sectorielles pour mesurer la température économique. Sur la base de cette enquête (menée durant le mois de novembre), elle dresse le bilan de la situation économique belge et ses prévisions pour le semestre à venir.
This article provides an overview of recent relevant developments for the financial sector and financial stability in Belgium. Next to the uncertain macro-financial context, it covers developments in credit to the real economy, the impact of the COVID-crisis on banks’ and insurance companies’ activities and results, trends in the Belgian real estate market as well as more structural challenges facing the Belgian financial sector. It also provides an overview of recent prudential measures and recommendations to the financial sector.
Banking thrives in a calm and stable environment. After the global financial crisis of 2008, however, governmental authorities undertook a range of necessary measures that had an enormous impact on the funding and the reporting requirements imposed on financial institutions, systemic and specialized institutions alike. The ongoing COVID-19 crisis has further deepened the negative effects of the low interest rate environment, and forces all banks to think broadly, continue to digitalise their businesses, and seek for more alternative income. Smaller banks face the same challenges as their systemic counterparts but continue to believe in their strength to work close to their customers and find tailor-made solutions for their demands.
This article explores why some countries have been hit economically more than others by COVID-19. Using statistical techniques, several potential explanations are examined: the severity of lockdown measures, the structure of the economy, the fiscal capacity of the government to counter the collapse in economic activity and quality of governance of the country.
Despite the pandemic, the long-term paths of slow growth and low inflation remain intact, albeit with greater uncertainty around inflation. The pandemic has triggered even easier monetary policy, although fiscal policy is likely to take the leading role in promoting economic growth in the decade ahead.
Strong returns from equities and high-quality bonds through the pandemic have left valuations stretched. A traditional 60/40 portfolio of global stocks and U.S. bonds presents a very subdued frontier of potential returns. However, many other asset classes shine above this low horizon, including European and Emerging markets equities, high-yield and emerging market debt and an assortment of alternative investments. In addition, active management should be able to take advantage of distortions in relative valuations that have been created by years of central bank intervention and momentum investing.
The market system is subject to limits that have to do with externalities, inequalities and excessive market concentration. These can only be taken care of by government action. But governments are also subject to limits in their capacity to act. In my book “The Limits of the market” I analyze the nature of these limits and how they can be overcome.
Construction and real estate activity recovered after the first COVID-19 wave starting in the summer, but the tightening of security measures may again temporarily weigh on activity in Q4. We take into account a fall in house prices in 2020 and 2021 due to the recession weighing on household income. However, the fall in prices remains limited by low interest rates, investor demand and government measures to mitigate the damage to income.