Key predictions for the US stock market in 2021 (Part 1)
2020, which is coming to an end, is an extremely special year in human history. The COVID-19 outbreak, which began at the beginning of the year, had a huge impact on the global community. In addition to the painful epidemic infection situation, there have also been traffic disruptions between countries that have continued until now, and normal trade, investment, services, etc. have completely stopped, and even the Tokyo Olympics have been postponed until next year. The last time a global public health crisis occurred was the Spanish flu from 1918 to 1919. However, the last time the Olympics and the like were cancelled, countries blocked borders, etc. were still during World War II. This year is also the first time in 75 years since the end of World War II that there has been a rise in global poverty, a reversal of globalization, a shortage of food, and a rise in the number of hungry people. Faced with the once-in-a-century crisis, governments around the world made full use and carried out a large number of public health, fiscal, and monetary crisis countermeasures. The financial market has also set many historical records this year, including serious negative price transactions for crude oil prices, including three-digit volatility in the stock market, as well as serious losses in many top quantitative funds and fundamental funds. So what do you think of the global financial market next year? The author hopes to put forward some opinions through this article for everyone's reference.
1. The explosive growth of initial public offerings (IPOs) drove US stocks to rise and then fall
The author believes that the biggest financial market event in 2021 will be the initial public listing of a large number of companies, that is, the implementation of IPOs. The COVID-19 pandemic has triggered the Federal Reserve's large-scale quantitative easing policy, resulting in excellent market liquidity. Since the end of the last financial crisis, a large number of innovative enterprises that began in 2009 have reached maturity. Whether in the sharing economy, cloud computing, fintech, biopharmaceuticals, or healthcare industries, hundreds of unicorn companies are relatively mature and can become publicly listed companies in the secondary market. In fact, starting this fall, the number of US companies listed has begun to increase on a large scale. The recent homestay sharing company Airbnb (Airbnb) rose 112% on the day it went public, and the successful case of a market capitalization of 83 billion US dollars is a great encouragement for other unicorn companies that are still hesitating. In the more than a month since Palantir, a loss-making big data company, went public, its stock price has doubled and its market capitalization has exceeded 51 billion US dollars, which has also had a very positive impact on the listing of other unicorn companies that have not yet achieved profit.
Of course, there are three more special reasons why a large number of US stocks will be listed next year. First, after the Republican Party's tax cuts for the past four years, it is likely that the tax increase will begin after the Democratic Party enters the White House. Including capital gains tax, personal income tax is likely to rise. From the founder of the enterprise to employee shareholders, there is an incentive to increase the tax rate as soon as possible before it rises to obtain good after-tax returns. It may take about a year to pass the new tax law, so the management of unicorn companies will race against time next year to achieve listing as soon as possible.
The second reason is government support. The number of tradable shares of US listed companies has declined by 2-5% every year over the past ten years due to continuous large-scale repurchases by various listed companies and continuous mergers and acquisitions carried out by listed companies in various industries. US stocks are in a state of serious imbalance between supply and demand, and the total number of listed companies has dropped by more than 2,000 in the past 20 years. What is more obvious is that Microsoft, Google, Apple, Facebook, etc. are buying back hundreds of billions of dollars of shares and mergers and acquisitions of dozens of companies every year. Over the past few years, the US Securities Regulatory Commission has continued to encourage companies to go public, reduce listing costs, reduce disclosure requirements for small and medium-sized enterprises to go public, etc. These policies have all begun to show results. This year marks the first net increase in the number of tradable US stocks in more than ten years. According to our communication with several major US exchanges, a large number of companies are planning to go public next year.
The third reason is that a large number of unicorn companies' options will expire soon. Generally, after the establishment of a company, options are valid for 5-10 years. The listing of companies, including Airbnb, is also driven by employee shareholders. Because if the company is not listed, the value of the option is likely to be zeroed out.
After a large number of companies go public in the first half of next year, it is likely to drive US stocks to continue to rise sharply. However, along with the overvalued listing of these unicorn companies and the need for large numbers of shareholders to cash out after the shares are unlocked, there is a high possibility that US stocks will weaken in the second half of next year. If fiscal policies are combined with taxes, the probability that US stocks will plummet in the second half of 2021 and enter a bear market is also relatively high.
2. The global wave of bankruptcies and defaults has led to heavy losses for bond investors
After the outbreak of COVID-19, countries around the world introduced emergency relief measures. Countries including the US, Canada, and other countries directly send cheques and issue money, including quantitative easing of zero-interest rate policies by central banks in various countries, as well as loans for businesses to maintain employment. All of these conditions have led to significant increases in leverage ratios in countries around the world. 2020 is probably the year where developed countries' debt rose the fastest in the past 100 years, higher than the growth rate of borrowing during World War II. Many developing countries are also being forced to borrow heavily to maintain imports of many necessities such as food, energy, and medical care. The International Monetary Fund organized financial support, debt relief, etc. for more than 50 countries around the world this year.
However, whether it is a large number of zombie companies' loans or the sovereign debt of many countries, they may face a serious risk of default next year. In particular, for developed countries in Europe and America, temporary relief for enterprises due to the coronavirus outbreak is gradually expiring. It can be expected that a large number of small and medium-sized enterprises will choose to go bankrupt and close their business in a situation of severe negative cash flow. Many emerging market countries' debt is facing the same problem. Countries such as Argentina, Ecuador, Lebanon, and Zambia have defaulted on their sovereign debt this year, setting a record high in the number of countries that have defaulted on their sovereign debt. International rating agencies have added the ratings of Gabon, Mozambique, the Republic of the Congo, and Suriname to the “CCC”, and the “B-” rating of El Salvador, Iraq, and Sri Lanka as negative prospects.” The definition of “CCC” is significant credit risk: default is a real possibility. This year, even the major emerging market countries India and Turkey have had their ratings downgraded. Definitions and historical experience mean more countries are likely to default further in 2021. The data shows that from 1995 to 2019, the average annual default rate of CCC/CC/C sovereign countries was 26.5%.
What can be expected is that if a large wave of defaults occurs, the losses of investors in fixed income products will be extremely serious. Institutions and high-net-worth customers, including those investing in corporate bonds, bank loan portfolios, high-yield bonds, and sovereign bonds of emerging market countries, may face some problems such as drastic principal reductions, debt restructuring, and deferred payments. And speculators who are shorting the sovereign bonds of developed European and American countries may face another lost year.
III. Inflation and deflation coexist
Since this year, central banks around the world have released the highest amount of liquidity in history due to large-scale quantitative easing. Including the close doubling of the balance sheet of the Federal Reserve in March, including the European Central Bank's bond purchases of more than 3 trillion euros, as well as direct purchases of stocks, especially real estate trusts, by the Central Bank of Japan, all violate the central bank's prudent principles. Do many institutions think that the release of liquidity on this scale will definitely cause inflation?
The author believes that what may occur in 2021 is a “half flame, half seawater” price change. Judging from the overall price level, since the core driver of inflation is not supply but demand, it is very unlikely that there will be serious inflation next year. After the outbreak of COVID-19, countries experienced serious unemployment problems. The unemployment rate will remain high next year, and it may even rise again in some countries and regions. With the unemployment rate high, upward pressure on wages is extremely limited, so it is difficult to fill the demand-side gap after the COVID-19 outbreak. Office rents can be seen in the US. Residential apartment rents in core locations such as New York and San Francisco have dropped by more than 20%. Judging from this point of view, CPI may continue to experience deflation problems next year.
Of course, commodity prices are likely to rise in stages next year due to a massive reduction in production capacity. First, traditional energy industries include crude oil, and natural gas prices have fundamental factors that continue to rise. Crude oil inventories have declined sharply recently, and investment in capital projects by energy companies has also fallen precipitously in recent years, and the crude oil market has begun to rebalance. Industrial metals, including iron ore, copper, aluminum, zinc, etc., are also facing a similar situation. This year's El Niño phenomenon has had a great impact on the harvest of agricultural products, and will also lead to insufficient supply of agricultural products worldwide. All of these are likely to lead to cyclical increases in commodity prices. Investors' conclusion is that the consumer goods inflation rate is limited, or even deflation, but the prices of industrial and agricultural raw materials are showing signs of inflation. The author's view is that the price transmission from the rise in raw material prices to the consumer goods and services industry will eventually become apparent in 2022 and later, compounded by the release of global liquidity, and there is a possibility of cyclical hyperinflation in the mid-20s.
4. Fintech companies comprehensively suppress traditional financial institutions
Although US stocks are generally in a bull market this year, and the NASDAQ index is rising at a record high, the stock prices of traditional financial institutions are very bleak. The US banking stock index fell by more than 20% this year. The stock prices of America's most core investment banks and commercial banks, including Goldman Sachs and Wells Fargo, are far worse than the general market index. Even Mr. Buffett, who has been investing in the financial industry for a long time, has cleared stocks of financial institutions such as J.P. Morgan Chase, Wells Fargo, Goldman Sachs, etc. At the same time, the stock prices of dozens of fintech companies in the US are booming, and the stock prices of many companies in the payment industry have risen 3 to 5 times.
The author has been offering a fintech course at New York University for three years, and the students have done case studies on a large number of fintech companies. Arguably, most fintech companies are still in the early stages of large-scale business growth. This year's COVID-19 pandemic has actually acted as a booster for the development of fintech. In the past, many Americans used to use checks, go to bank counters to handle business, and go to insurance company stores to buy insurance policies. Due to the COVID-19 pandemic, many people have been forced to move their financial services online to enable mobile payments, etc. It is believed that in 2021, a large number of substantial financial, insurance, investment, asset management and other businesses will migrate from traditional financial institutions to fintech companies.
5. Countries fully launch digital currencies
Although thousands of digital currencies, from Bitcoin to Ethereum, are already in circulation in the market, digital currencies are currently not fully recognized by central banks and financial regulators in various countries. The author believes that 2021 will be the year when digital currencies are officially recognized and accepted by governments for the first time. Various cryptocurrency payment methods based on blockchain technology, including the domestic digital yuan, including the Federal Reserve's digital dollar, and the European Central Bank's digital euro, are all scheduled to be officially launched next year.
It is important to be clear that the introduction of digital currencies in various countries does not mean that the price of Bitcoin or other cryptocurrencies will rise sharply. As more and more digital currencies are introduced, regulations on these currencies will continue to be strengthened. In other words, the anonymity and global convertibility of previous digital currencies may gradually be eroded. The current DiFi innovation is trying to establish a parallel transaction system with the traditional financial industry, but many of the concepts and operating institutions within it still take time to verify their credibility. The security of digital currencies also requires continued investment in resources and development. Including custodian agencies, exchanges, clearing agencies, and various digital currency investment products, etc., will have a huge breakthrough in 2021.
(The full article was first published in Zhichuang Bay Area)
