2021 Market Outlook Investment Barometer January 2021 - CitiDirect BE | Bank Handlowy w ...
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2021 Market Outlook Investment Barometer January 2021
Ladies and gentlemen,
It is with great pleasure that we say goodbye to 2020, which will certainly be remembered in the pages of history as the
period of the fight against the global COVID-19 pandemic. In the economy and financial markets, the new virus has also
created quite a stir. We have never before dealt with the proverbial "unplagging" of the global economy. Practically at
the same time, restrictions were introduced in many markets to protect our health. We have seen the side effects of the
restrictions in many businesses, the most affected were tourism, hotel and aviation companies, as well as restaurants
and retail with a significant stationary turnover. From the economic point of view, in the initial stage of the pandemic, we
observed the so-called supply-demand shock, disruptions in the supply chain and a dramatic change in consumer
preferences. As a result, we faced the worst recession since World War II - we expect global GDP to contract by 4% for
the whole of last year. In the equity markets, we saw the fastest slump in history, significant drops in indices in the first
quarter of the year and an equally rapid rebound in the following months. The fuel for the increases in the initial phase
was the monetary and fiscal stimuli implemented practically simultaneously across the globr. Central banks started with
increased asset purchases, and the governments of individual countries announced further fiscal support. However, it
should be emphasized that the accelerated technological transformation also played a significant role, speed of operation
was of key importance here. Every crisis creates opportunities at the same time, and so it was this time, tech companies
benefited from it, and their business became even bigger and more profitable.
In the New Year, we believe that there will be a significant rebound in economic activity, Citi economists expect global
GDP to grow by over 5% in 2021. The first months may still be difficult, but as the number of vaccinated people increases,
so will optimism and a return to increased economic activity. In addition, geopolitical risks were mitigated, the US election
was won by Joe Biden, the Democrats have control over the House of Represents and the Senate (the so-called "blue
wave" scenario), and the United Kingdom has worked out an agreement with the European Union on Brexit. For savers
and investors, the key parameters are the interest rate and inflation. However, we do not expect significant changes
here, and the so-called zero interest rate policy will continue in developed markets. Maintaining the real value of our
savings will therefore also be a challenge in 2021. According to the assumptions of Citi economists, global inflation
should be around 2.2%. We would like to remind you that there are no shortcuts on the financial market, in order to
systematically beat inflation, it is worth focusing on the construction of a globally diversified investment portfolio. The up-
to-date overview of the markets and economic events is extremely important, but we attach even more importance to
matching the client's portfolio to the goals and risk tolerance. In the coming year, it is also worth looking towards socially
responsible investments. Globally, we are observing a trend of a significant increase in the assets of funds driven by
ESG factors. Managers of such funds take into account the environmental, social and governance impact of the company
in their investment decisions.
We wish you optimism, plenty of profitable decisions and successful investments in the new 2021.
Maciej Pietraszkiewicz, CFA
Head of the Investment Advisory and Mutual Funds Bureau
Investment Advisor
Adrian Gabzdyl
Investment Advisor
Piotr Szulc, CFA
Securities Broker
Bartłomiej Grelewicz
Investment Advisor
Dariusz Zalewski
Securities Broker
Artur Zakrzewski
Michał Wasilewski
22020 Summary
Forecasts of GDP decline in 2020 for It did not take long for the negative scenario to materialize.
selected regions The coronavirus epidemic that started in China quickly
turned into a global pandemic, driving an avalanche of
declines on global stock markets. The sell-off in developed
-11,2% UK
markets lasted just over a month, a few weeks shorter
-7,3% Eurozone than in emerging markets, which started discounting the
-7,2% Latin America situation in China in advance. Despite the short period of
decline, their scope turned out to be very deep. We can
-5,3% DM
therefore speak of the shortest in history bear market, but
-5,1% Japan one that we will be remembered for a long time. The MSCI
-3,9% Global World and MSCI Emerging Markets indices dropped by
-3,4% U.S. over 30%. More risky classes of bonds, including high
yield (HY) and emerging market (EM), were losing
-2,0% EM
significantly. Concerns about the condition of the global
-0,4% Asia economy had a negative impact on commodity prices. At
their peak, crude oil contract prices even turned negative.
Source: Citi Research: Global Economic Outlook, Citi The declines also affected the corporate investment grade
Handlowy (IG) bonds, as well as the sovereign debt of the euro area
peripheries. Strong risk aversion resulted in an increase in
Traditionally, at the turn of December and January, it's the value of the US dollar, treasury bonds from core
time for an annual summary. The past year will surely be markets as well as gold. The very development of the
remembered for a long time not only by capital market pandemic was only an inflammatory factor. The shock in
participants, but also by all of us playing the role of the markets was caused by the decisions of the individual
household members, employees and business owners. governments to tighten and close their economies. Activity
The pandemic year of 2020 has brought numerous in the industrial and service sectors decreased
negative consequences in the economic and social zones, dramatically, which in turn translated into very poor macro
introducing heightened concerns about the future of readings, negative revisions of forecasts and deterioration
companies and even entire industries, as well as our own of leading indicators. The aim of the lockdowns was to limit
and our loved ones' health. Despite this, capital markets the pandemic pace, but the very fact of their introduction
have survived this period quite well. Maintaining an had a bad effect on businesses and entire economies. On
appropriate portfolio diversification and taking advantage the other hand, central banks and decision makers
of the 'hot' moments on the market to balance more risky devised plans to support economies and facilitate
assets, made it possible to achieve above-average rates recovery from the inevitable crisis. The result of this work
of return throughout 2020. was the announcement of many stimulus packages on an
unprecedented scale. In retrospect, it should be
We started the previous year with our negative outlook on emphasized that these actions were of key importance in
equity instruments. Despite the first phase of agreement the shaping of later trends on the global capital markets.
between the US and China, the risk of an escalation in the Soon after the announcement of the first monetary and
trade war was weighing on the market. The trade fiscal packages (and in the hope of more), the
agreement between Great Britain and the EU remained aforementioned bear market hit the bottom, and investors
under further negotiations, and the vision of an armed turned en masse towards risky assets. Strong upward
conflict between the United States and Iran became more trends in the stock markets, commodities and among the
and more real. Taking into account also the strong more risky classes of bonds continued practically until the
increases in global stock indices in 2019, we assessed end of the year. Subsequent reports of the spreading
that the potential profit to risk ratio for this asset class is pandemic, the fall's second wave, the risk of renewed
unfavorable at that time. Expecting increased volatility and lockdowns, and the incoming weak macroeconomic data
market correction, we preferred to focus on money market only caused periodic adjustments to the ongoing uprward
instruments overweight in tactical portfolios and neutrally trend, not reversing it. Ultimately, the MSCI World and
rated bonds. MSCI Emerging Markets indices from the low end in
March have already gained about 70%, which, despite the
3intense declines from the first quarter of this year, gives a with China, which have deteriorated significantly over the
full-year increase of 14% and 16%, respectively. course of his candidacy. December also saw the approval
of the EU budget with the Reconstruction Fund, as well as
Looking in more detail, the American stock exchange was the elaboration of a trade agreement between the EU
once again leading among the developed markets, where Community and Great Britain, with its final approval by the
the market structure with a large share of technology and House of Lords, the Prime Minister and Queen Elizabeth.
healthcare companies allowed us to survive the period of
declines relatively better and enabled a stronger rebound All in all, behind us is a turbulent year full of negative
(S&P 500 + 16% y/y, Nasdaq + 44% y/y). In turn, the emotions related to the spreading pandemic, during which
positive result of MSCI Emerging Markets is an effect optimism prevailed in the markets after the initial panic.
mainly of increases in the Asian region (MSCI EM Asia + Over the last twelve months we have been actively
26% y/y). Despite an equally dynamic rebound in the monitoring the development of the situation, trying to
European markets, the full-year rates of return remained reasonably and profitably adjust our positioning to the
negative in most regions (Eurostoxx 50 - 5% y/y, Stoxx changing market situation. As a result, several times, but
600 -4% y/y). Among the core market indices, only the gradually, we increased the share of equities in our tactical
German DAX ended the year above the levels from the portfolios at the expense of instruments with a lower level
end of 2019. Among domestic companies, noteworthy is of risk, which ultimately proved to be an effective strategy.
the strong growth in the segment of small capitalization Many times, using our monthly, special or educational
entities (sWIG80 + 34%), which after the collapse of the materials, we emphasized that when creating an
first quarter returned with increased force to the trends investment portfolio and periodically revising it, one should
observed in 2019. The broad WIG ends the year with a not try to 'catch lows and highs'. Such actions are rather
loss of just over 1%. Despite this, the strength of the the domain of market speculation. Our approach focuses
rebound from the March lows and a noticeable increase in on making tactical changes to the portfolio while
interest in shares among domestic investors may be a maintaining its appropriate diversification, using asset
good prognosis for our market in the coming years. Last classes and sub-classes assessed in terms of profit-risk
year, investors with a more conservative approach could relationship. The past year has clearly shown that the
also profit quite well. The continuation of the central banks' current trends in the capital markets may be far from the
bond purchase programs, the flight to treasury securities current economic situation (an example of the GDP
at the beginning of the year and the growing appetite for forecast for 2020). The incoming weak macro data and
more risky bond classes in the following months made all negative news regarding the spreading pandemic posed
the bond indices presented in our Barometer generate serious risks, but the intense sell-off in the first quarter
high annual rates of return. made the profit-risk relationship for equity instruments
deviate in a positive direction, which global investors took
Looking at the behavior of global stock indices, one can advantage of.
get the impression that the pandemic problem was
resolved in March. The monetary and fiscal stimulus of
central banks and the actions of governments helped to
stop the avalanche of declines and allowed for a quick
recovery. The subsequent maintenance of the upward
trend was already largely based on faith in an effective
fight against the pandemic, and above all in the rapid
development of a vaccine against the coronavirus. Every
positive piece of news in the field of clinical trials was used
as an excuse to continue the growth of equity valuations.
The November reports of over 90% efficacy of vaccines
invented by Pfizer, BioNTech and Moderna have
reawakened hope for an imminent return to normality,
providing a strong excuse to further price push. The
results of the presidential election in the United States
were also optimistic. The market hopes that Trump's
failure to reelect, in particular, will help improve relations
42021 Market Outlook - Equities
Developed markets and central banks. Economists also assume that President
Joe Biden's announcements from the election campaign to
Equity markets enter 2021 with a large pool of optimism, withdraw some of the tax cuts for large corporations
and its strong pillar is the support of governments and implemented by the previous president's administration will
central banks for the global economy. Financiers in the not be introduced, because in the second half of 2022
American financial media cite the recipes of the Polish Democrats are waiting for elections to the House of
economist - Michał Kalecki, a supporter of increased state Representatives. American policymakers should therefore
spending if they are aimed at increasing employment. not rush in reducing support for the economy, as the
Kalecki, who in the years 1936-1945 worked, among others political calendar is not conducive to making potentially
at the London School of Economics and at the University unpopular decisions.
of Cambridge, published his work "'An Attempt at the
Theory of the Business Cycle" in 1933, three years earlier Profits recovery
than John Maynard Keynes. Many government stimulus
programs, both in Poland and abroad, were aimed at Citi analysts expect global corporate earnings to grow by
maintaining employment levels, and some countries opted 25% y/y in 2021, but as financial markets are ahead of the
for direct wage subsidies. In the United Kingdom, the future, stock price increases in 2021 may be more
government has decided to extend the subsidies to 80% of moderate. The current business cycle, disturbed by
salaries by the state, until the end of April 2021, for those governments' decisions to introduce restrictions in most
employed on a reduced employment term. In the US, in European countries, as well as in some states in the USA
December, the US Senate passed an increase in and, to a limited extent, in Asian countries, increases the
unemployment benefit by $ 300 a week, as well as a $ 600 unpredictability of forecasts of the results of companies
one-time check for people earning less than $ 75,000. USD from the service sector. However, the industrial sector and
per year plus an additional USD 600 for each child. The consumer companies recorded a recovery in the second
value of the package in the US, which enters into force in half of 2020 and their financial results should also improve
2021, amounts to USD 900 billion. In Europe, in December, in 2021. Forecasts assume an increase in profits of
the ECB announced an increase in the scale of bond industrial companies by approx. 20% y/y, cyclical
purchases by EUR 500 billion next year, which means consumer companies are to record profit growth exceeding
more liquidity in the financial markets of the euro zone. The 40%. More importantly, analysts expect an improvement in
governments of many countries have used Keynes' the results of companies from these sectors also in 2022,
prescription - direct interventions in the economy. As a while the dynamics of profits of IT and medical companies
result, the financial impact of the pandemic was mitigated in 2022 is expected to be lower than the average growth
for both businesses and consumers. rate of corporate profits. According to forecasts, revenues
of companies from developed markets (included in the
Our strategy for 2021 assumes a slight overweight in MSCI World index) should grow by 5-6% year on year, in
equities, and we see better prospects for emerging 2021-2022, while profits are to increase at an annual rate
markets. Citi analysts expect economic growth of 5.0% of 15-25% (see the table on the next page). The
next year, mainly due to a rebound in the US and emerging appointment of two seats in the Senate elections in Georgia
markets, as well as in selected European countries that are by the candidates of the democratic party, de facto means
less tied to tourism. However, the prognosis is subject to control of the Democrats in the Senate, because in the
high levels of uncertainty due to the unknown rate of event of a balance the vice president will have the deciding
possible improvement in the coronavirus infection vote. The new administration in the White House will
statistics, which we owe to vaccines. If the economy returns therefore be able to push through plans to increase
to its old tracks, traditional sectors with the potential to spending in order to increase investment or social
continue the rally started in November should benefit. The transfers, which increases the chances of a boost to
stocks of pharmaceutical and IT companies, which are the economic growth and increases the likelihood of a
flywheel for increases in stock exchange indices in 2020, continuation of gains in stocks in developed markets.
should not gain as much as in the past year.
The main arguments of stock exchange bulls are the
recovery of corporate profits in 2021, sector rotation and
the maintenance of support for economies by politicians
5Forecasts of financial results per sector If the GDP growth was broad, then equity investors could
look for investment opportunities in the stocks of
Forecasts - companies belonging to the 'old economy' sectors -
y / y change industry, consumer staples, mining companies or
2021 2022 financials. We have observed increased investor interest in
MSCI Information Technology Sales 8,1% 7,6% stocks of companies from these industries since the
Net profit* 23,6% 13,2% publication of the results of the third phase of clinical trials
MSCI Industrials Sales 2,8% 7,2% on the vaccine, i.e. from November last year. However, if
Net profit* 20,0% 19,1% the economic outlook were to be revised downwards,
relatively expensive IT and pharmaceutical companies
MSCI Consumer Discretionary Sales 11,9% 9,4%
could maintain the positive trends of 2020, although here
Net profit* 44,1% 24,8%
much of the expected improvement in financial
MSCI Consumer Staples Sales 5,1% 3,6%
performance is already factored into high equity prices.
Net profit* 10,3% 7,9% Valuations of IT companies from Europe and the USA
MSCI Materials Sales 5,2% 3,9% based on already reported profits prove a high premium in
Net profit* 47,4% 5,2% relation to broad market indices. Shares of tech companies
MSCI Energy Sales 7,3% 8,3% overseas included in the Dow Jones US Technology index
Net profit* 0,0% 53,4% are quoted 39x profit, and in Europe 41x profit for 2020.
MSCI Real Estate Sales 0,3% 7,4% Investors expect a large improvement in net profits in 2021
Net profit* 13,1% 10,2% (see table below) - in Europe by 33,5% in the USA and
21.9%, but the valuation indicators also based on forecasts
MSCI Financials Sales 0,0% 2,0%
are exorbitant. Companies from traditional industries
Net profit* 21,0% 16,9%
strongly represented on European stock exchanges can
MSCI Communication Services Sales 6,1% 7,0% benefit from the allocation of funds from the Reconstruction
Net profit* 24,8% 10,7% Fund in the second half of the year, as well as from the
MSCI World Health Care Sales 9,2% 5,2% implementation of a trade agreement between the
Net profit* 41,3% 8,7% European Union and China. Citi economists assume that
MSCI Utilities Sales 9,2% 1,5% global GDP will reach pre-pandemic levels in mid-2021
Net profit* -9,9% 5,4%
MSCI World Sales 6,0% 5,7%
Net profit* 24,7% 14,5% Profit growth forecasts for US and European tech
* Earnings per share, excluding companies reporting a loss companies and price-to-earnings (PE) for their
indices
Source: Bloomberg, Citi Handlowy
Profit Profit
growth in growth in
2021 2022
Sector rotation Dow Jones US Technology Index 21,9% 12,9%
MSCI Europe IT 33,5% 16,2%
The macroeconomic scenario assumed by Citi economists
forecasts global GDP growth in 2021 at 5.0% y/y in 2021
and 3.6% y/y in 2022, after a decline of 3.9% in 2020. This
year's recovery in the euro area is to be slower than in the PE 2021 PE 2022
US, but Western Europe should increase the GDP growth
rate in 2022 to 4.3% y/y as compared to an increase of Dow Jones US Technology Index 30,8 27,2
3.6% y/y in 2021. Distribution of reconstruction funds in the MSCI Europe IT 29,7 25,5
EU planned for the second half of 2021, may reinforce the
positive trends in 2022.
Source: Citi Research, Citi Handlowy
6Suport from governments and central banks It is still important for investors to follow leading economic
indicators in Europe and the USA (including regional
Increasing the scale of the ECB's bond purchases by EUR economic indices overseas). The December PMI reading
500 billion in December 2020 means an increase in the for the German industrial sector was above forecasts at
value of the entire program to EUR 1.85 trillion, so in the 58.3 pts, while the Composite PMI for the entire euro zone
first half of the year the scale of intervention on the increased to 49.8 pts from 45.3 in November. Readings of
financial market initiated by the monetary authorities from December indices for industry in some US States like
the euro area may exceed the scale of support by the Fed Philadelphia and New York turned out to be weaker than
and the Bank of Japan. Direct government support for forecasts, which may mean a slowdown in the strong
businesses and the labor market in Europe is likely to be momentum for the US industry. We see a second
phased out gradually throughout 2021, but it depends on important risk factor in the investors' almost euphoric
the rate at which infections are reduced, and vaccination sentiment for equity markets. The high inflow of funds into
is effective and popular in individual countries. Most global equity funds around the world, and the conversion
economists, however, do not expect the intervention of in the US of significant amounts from money market funds
central banks to be limited during 2021. At the conference to equity funds, add fuel to gains in developed countries.
after the December Fed meeting, the head of the However, the passive attitude of board members of listed
American central bank, Jerome Powell, declared that in companies, who used the increases in indexes in August
the event of a slowdown in economic growth, the scale of and November last year to sell shares on Wall Street, is
intervention may even be increased. worrying. However, we believe that possible corrections in
global markets should be used to increase involvement in
Risks
equities, as the favorable economic environment - low
The main risks to the optimistic assumptions at the interest rates, a wide range of improvement in the
beginning of 2021 are related to the possible slower than performance of companies, and fiscal and monetary
expected economic growth, which could translate into a support - should continue not only in 2021, but also in
weaker than assumed improvement in corporate profits. It 2022. .
is difficult to predict when the positive effect of
vaccinations will be visible in terms of lifting restrictions or
reducing the number of infections.
Emerging markets
Relative strength of emerging market equities
Emerging market stocks have been moving sideways for
more than a decade, while developed markets have 2,50
climbed to new highs in a continuous uptrend almost every
year. In 2020, the emerging markets index - MSCI
Emerging Markets recorded a greater increase in value 2,00
than the index grouping developed markets - MSCI World
by over 2 pp. The last time this happened was in 2016.
Additionally, the EM index rose to new highs, breaking the 1,50
2007 peak. Is this the beginning of a new trend or is it a
one-off?
1,00
As Citi analysts forecast, this trend may continue and EM 0,50
2000 2005 2010 2015 2020
may outperform developed markets as well as other
traditional asset classes in 2021 and beyond. The key MSCI EM / MSCI WORLD
elements supporting the momentum as indicated by our
analysts are: Source: Bloomberg, Citi Handlowy
7(1) a weaker US dollar, which will have a positive impact Donald Trump. It is worth noting that during the Trump
on pro-cyclical currencies of emerging markets (2) a presidency, China-US diplomatic relations have fallen to an
"smoother course" of US trade negotiations with China (3) unprecedented low level since the two countries began
higher economic growth and related corporate earnings in working together. The talks and rivalry between them will
emerging markets relative to developed markets and (4) therefore continue, but the Biden administration may be
favorable relative valuations of EM equities in relation to more predictable, which greatly reduces the risk of volatility
DM. in the markets. In this context, China recognizes that it
needs to accelerate its efforts to become self-sufficient in
There is broad consensus among analysts that the dollar the manufacturing of processors and semiconductors and
continues to weaken, which should support emerging other key technologies from which it has been cut off under
market assets. The weakening dollar may be caused by US sanctions, and to rely more on domestic demand. In the
investors' concerns about the growing US government fourteenth five-year plan, the strategy of the so-called
debt, interest rates close to zero and an unclear economic "Double circulation" was announced, which provides for
picture. The previous cycle of dollar depreciation in the openness to foreign investment while building an economic
early 2000s was associated with a large jump in the US system that is less dependent on other countries
current account deficit, a situation where the value of (especially the US). Another important element of this plan
imports exceeded the value of exports. Analysts point to a is the increase in incomes of less affluent people and the
general undervaluation of the currencies of emerging reduction of development gaps between the countryside
markets, mainly the Latin America region with the largest and the city and between individual regions. The Chinese
fiscal deficits, and to a lesser extent Asian countries, more government thinks and works for the long term and is
resilient thanks to solid fundamental data from the region's committed to innovation, particularly supported by the large
economies. Although local interest rates have fallen and number of engineering graduates and technology newbies.
are at historically low levels, they still offer higher yields Tensions will be alleviated by China's further opening up to
compared to developed markets, which may cause capital foreign participation in the economy and the fact that the
inflows and strengthening of EM currencies (also in Asia). leaders of both countries see climate change as a common
For the global investor with the largest share of the US goal (in September 2020, Xi Jinping announced an
dollar in the portfolio, currency fluctuations are an important ambitious climate goal - China is to reach the 2030 carbon
element influencing the overall rate of return for assets in dioxide emissions peak and reduce emissions to almost
other currencies, as the differences of the same index in zero by 2060). Important events that will help define how
local currency versus US dollar in some markets differed relations between these countries will unfold in the near
by more than 20 pp this year, as was the case, for example, future will include: (1) Biden's initial meeting with Chinese
in Brazil. The "blue wave" scenario in the US, i.e. the President Xi Jinping and discussions on the future of the
Democrats' control of the White House, the House of current tariffs and the trade deal in phase one, and (2)
Representatives and the Senate, will probably entail an Biden starting an alliance talks mainly involving European
even greater fiscal deficit, which should negatively affect countries and Japan to force China to improve access to
the US dollar. its markets.
In 2020, equities from the Asian region performed by far Citi economists' forecasts for GDP growth for 2021 seem
the best and investors hope that this year will also bring to confirm the strong position of Asia (forecast 7.5%) and
higher rates of return than other EM countries. China, China (8.2%) in relation to other EM regions of Latin
Taiwan and South Korea deserve special attention, as last America (4.1%) or Europe (3.4 %), but also compared to
year's results of emerging markets were driven mainly by a developed markets such as the USA (5.1%) or Japan
dozen or so companies from several sectors in these (2%). It is also worth emphasizing the relatively low price
countries. Additionally, further support in trade between pressure in the Asia region in relation to other EM
countries in the region will be the implementation of the countries. Citi analysts forecast inflation in this region at
agreement (RCEP) signed in November by 15 countries in 1.7% and in China at 1.2%, while in Latin America it will
Asia and the Pacific. Especially for the Chinese economy amount to 8.6% or 5.3% in emerging Europe. As the
and its close trading partners, the approach of President- situation with the vaccine improves, global corporate
elect Biden to US-China relations will be of key importance, profits correlated with economic growth are set to rise in
which, in the opinion of analysts, will be milder, but relations 2021, and expectations that vaccination should be widely
with China will not return to what it was before the term of rolled out by the second half of the year will enable further
8business recovery and support a broad economic Valuation levels, the likely weakening of the dollar against
recovery, especially in the sector services. Citi analysts EM currencies, strong fundamental data and optimistic
forecast that the global profits of companies in 2021 will growth forecasts make emerging market equities, in
increase by 25% compared to a 15% decrease last year. particular in the so-called North Asia (China, Taiwan,
Profits for emerging market companies as well as US South Korea) can be one of the more interesting ways to
companies should at least return to pre-pandemic in 2021, diversify the stock portion of your portfolio without adding
giving European companies more time to return to these stocks at inflated prices. It is an approach close to the
levels. GARP (growth at resonable price) investment strategy, i.e.
buying growth stocks at rational prices. Nevertheless, one
In terms of valuation, emerging market equities perform should not forget about a reasonable approach to
much better compared to developed markets. The investment and a wide regional and sector diversification,
projected price-earnings ratio for 2021 (the so-called because as 2020 showed, all the most important risk
forward P/E) for the MSCI EM index is 15.6, while for the factors indicated by analysts as crucial for the previous
MSCI World index, this ratio is at the level of 21.5, with year have been overshadowed by the coronavirus
averages for the last 10 years for both markets pandemic and the reaction of individual countries in the
respectively: 13.8 and 18.7 . This means that emerging form of closing economies and fiscal and monetary
market equities are currently trading at more than 30% packages. This made ongoing observation and immediate
discount to developed markets. The chart presented investment decisions crucial, which is extremely difficult,
earlier, showing the relative strength of the MSCI EM especially for emerging-market equities, for which rates of
index to the MSCI World index, is at its lowest levels in return and risk vary greatly from country to country.
over 17 years and we have seen a slight rebound since
last May.
92021 Market Outlook - Bonds
Rates of return on selected bond indices in recent years (in turn: index of investment grade global bonds,
index of high yield global bonds, index of global bonds issued in USD from developing markets,
index of Polish treasury bonds)
Bond index 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Bloomberg Barclays Global Aggregate IG Index 5,6% 4,3% -2,6% 0,6% -3,2% 2,1% 7,4% -1,2% 6,8% 9,2%
Bloomberg Barclays Global HY Corporate TR Index 2,6% 18,9% 8,4% 0,2% -4,9% 14,0% 10,3% -3,5% 13,4% 8,2%
FTSE EM USD Government Bond Index 8,5% 17,6% -6,2% 7,0% 0,7% 9,6% 9,8% -4,1% 14,8% 5,4%
Warsaw Stock Exchange Treasury Bond Poland Index 5,8% 13,4% 2,0% 9,5% 1,7% 0,3% 4,8% 4,7% 3,9% 6,4%
Source: Bloomberg, Citi Handlowy
2020 Summary quickly came with help, "pumping" huge resources into the
economy and the market. As a result, the bond prices
Before we move on to the prospects for the bond market returned to the upward trend resulting in a second
for 2021, it is worth summarizing the one that has just consecutive year of excellent investment results (see table
passed. It was a turbulent period also for the debt market. above). This has significant implications, as it leads to a
As for the asset class associated mainly with 'security', we further decline in yields, and thus worsening of future
observed high volatility of prices. The apogee was of prospects. The value of debt with yields below zero has just
course reached in the first half of March, when the reached a record value (see chart below). 'Searching for
coronavirus epidemic began to take on a global scale. As profitability' (especially in real terms) becomes an
a result, in the financial market, we noticed not so much increasingly demanding task. It is also connected with the
'escape from risk', but even 'escape from financial assets'. necessity to bear increasing investment risk.
Liquidity fell drastically and investors were selling off nearly
all assets, including bonds. As a result, most of the bond Perspectives for the bond market
categories lost their value by nearly 10% in just a dozen or
so days, and the more risky bonds (HY and EM debt) even At the outset, it is worth paying attention to a certain
by around 15%. However, central banks and governments regularity presented in the table above. Usually, after two
years of more marked increases, the next year brings low,
The value of bonds in the world with negative yield often negative rates of return. With the low profitability we
(USD trillion) and the balance sheet of Fed and ECB currently observe, it will be very difficult to achieve third
(USD and EUR trillion) profitable year in a row. The rates of return may also be
(source: Bloomberg, Citi Handlowy) significantly different in terms of individual categories of
bonds. Much will depend on the moods in the financial
18
market, the level of inflation and actions of central banks,
12 the strength of the USD, geopolitics and the fiscal
conditions of individual countries.
6
We assume that in the coming quarters, with some
0 pauses during which there may be corrections in the more
2010 2012 2014 2016 2018 2020
risky assets, the moods will be moderately optimistic (this
will be influenced by the progress in the fight against the
8
pandemic, the continued monetary and fiscal support, the
6 improving macroeconomic conditions, Biden's more
4 subdued international policy). This in turn will favor the
listing of more risky bond classes such as HY corporate
2
debt and EM debt. We also expect an increase in inflation
0 dynamics, especially around the middle of the year, after
2006 2008 2010 2012 2014 2016 2018 2020
in 2020 almost deflationary readings were recorded in
Fed (USD) ECB (EUR) many countries (in the whole of 2021 inflation may reach
Źródło: Bloomberg, Citi Handlowy
102.2% globally). The so-called 'Reflation' (an increase in the Summary
dynamics of economic activity and inflation) may be a
good environment for the more risky classes of bonds, and The DM treasury bond market may seem unattractive.
a bit worse for the safer government bonds (with Rates of return may reach low-positive levels and are
investment rating). This is also confirmed by history - in unlikely to protect investors from a real loss of capital value
the periods of 'reflation', the US treasury debt earned an (we cannot even rule out nominally negative rates of
annual average of only about 1.5%, while corporate bonds return). Therefore, we are still quite clearly underweight in
from the US even around 9%. This time, however, we are our strategies, but we appreciate the low, even close to
not counting on such spectacular results, taking into zero correlation with HY and EM debt and slightly negative
account the current yield levels: the European HY is only with the stock market, which will allow us to maintain a
2.8%, and the American slightly more 3.8%, with spreads higher risk aversion this year with stability of returns on
to the yields of treasury bonds close to record low. This investment portfolios. Bonds from emerging markets
significantly reduces their attractiveness, but continued remain interesting - we note the aforementioned still high
central bank support may keep spreads low for a long yields and assume no significant strengthening of the
time. Historically, it allowed to obtain rates of return of USD in the long term, at the same time we see a lower
several percent per year. In our opinion, these parameters correlation with the equity market (approx. 0.4-0.5) than
look better on the EM markets: the aggregate corporate HY debt (approx. 0, 5-0.6), and thus lower exposure to the
debt of EM records profitability of approx. 3.2%, corporate risk of bad sentiment in the financial markets (as long as
HY EM 5.5%, and the treasury debt of many countries, the USD does not gain in value). In our opinion, HY debt
such as Russia, Indonesia, India, Mexico is approx. 5.5 - is too highly correlated and the portfolio risk can be
6%, and in Brazil even close to 7% (in the case of 10-year increased by exposure to stocks of companies rather than
government bonds). Of course, the fiscal position of these their debt. We emphasize, however, that after 2 years of
countries is much worse after the pandemic, but the same solid increases, both EM and HY bonds may face a well-
is true for developed countries. Moreover, in our opinion, deserved correction, generating even potentially slightly
investors' attention will be focused elsewhere this year. negative rates of return in extreme conditions. For such a
Debt issues and concerns may return, but we do not scenario, however, a strengthening of the USD would be
expect this to happen in the first half of the year. required and a return to the more 'hawkish' policy of
central banks, and this is not likely to happen in 2021. All
in all, our baseline scenario is a fairly good year for the
bond market, with positive returns in most of their
categories (in nominal terms), but much lower than those
recorded in the 2019-2020 boom period.
Yield (%) of 10-year Treasury bonds of selected countries (source: Fed, Bloomberg, Citi Handlowy)
7
6
5
4
3
2
1
0
-1
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
U.S. Germany UK Poland China
112021 Market Outlook - Commodities
When starting to consider the prospects for the popularization of remote work. At the same time, supply
commodities market on a general level, without analyzing remains under control. The OPEC + cartel withdrew from
individual commodities, it is worth looking at the moment the original assumptions about reducing the existing
of the economic cycle in which we now find ourselves. The restrictions on oil production. From January, production
table below shows the historical rates of return with cuts were expected to fall from 7.7 million barrels a day to
standard deviations, categorized by periods of growth or 5.8 million. Ultimately, a reduction of only 7.2 million was
decline in global GDP and inflation. Data concern two agreed. Thanks to this move, it will probably be possible
broad raw material indices: CRB and S&P GSCI and refer to achieve a surplus of demand over supply in 2021, which
to their beginning (1981 and 1970 respectively). The should support a gradual increase in oil prices.
differences in the results, depending on the
macroeconomic environment, are very clear. The highest The main threats to the above scenario include slower
rates of return accompany commodities in the event of than expected growth in demand, slowed down by
both rising inflation and rising economic growth. successive waves of illnesses and restrictions introduced,
Additionally, it is in such periods that the market risk, as well as a potential correction on the stock market, which
measured by the average standard deviation of rates of could lead to a retreat from broadly understood risky
return, is the lowest. assets.
The analysts' consensus assumes that in 2021 we will Gold
observe very strong economic growth (mainly due to the
For gold, the expected rebound in economic activity this
low base effect, i.e. a weak result in 2020), as well as a
year is of marginal importance. A much more important
slightly rising inflation (Citi's forecast is an increase from
factor is the projected increase in inflation, coupled with
2% in 2020 to 2.2 % in 2021). The macroeconomic
the persistently loose monetary policy of the key central
environment should therefore support the increase in the
banks. Such a combination of events should deepen the
prices of broadly understood commodities, while reducing
negative values of real interest rates, contributing to a
the risk of their volatility. What awaits us on the two most
relative increase in the attractiveness of gold. Rising
popular goods?
inflation has historically often been accompanied by a
Oil weakening of the US dollar, which is expected by analysts
also this time, which is also a factor supporting the
In the case of crude oil, the key driver for 2021 will appreciation of the commodity.
probably be a gradual return in consumption of the raw
material, towards the levels of 2019. According to OPEC The main brake for the gold price increases may be a
forecasts, 2020 brought a decrease in consumption by as further increase in investors' optimism fueld by by
much as 9.8 million barrels a day, i.e. approx. 10%. In effectively containing the pandemic with vaccines. Capital
2021, however, we can expect a rebound of 5.9 million inflows into the growing risk asset markets can encourage
barrels a day. It will therefore not be a return to pre-crisis the withdrawal of assets associated with security.
values, mainly due to the impact of the pandemic and the
Annualized rates of return on commodity indices depending on the macroeconomic environment
(source: Bloomberg, Citi Handlowy)
Macro environment Parameter CRB Index S&P GSCI Index
Growing GDP Average rate of return 4.4% 6.6%
Falling inflation Average standard deviation 11.1% 14.8%
Growing GDP Average rate of return 20.6% 33.5%
Rising inflation Average standard deviation 6.8% 13.0%
Falling GDP Average rate of return -2.4% 15.6%
Rising inflation Average standard deviation 14.1% 22.9%
Falling GDP Average rate of return -5.4% -1.3%
Falling inflation Average standard deviation 9.7% 25.5%
12Rates of return and indicators of selected indices (as of 31.12.2020)
Equities Value December 2020 3 Years P/E P/E (12M)
WIG 57025,8 8,3% -1,4% -10,5% 29,4 14,0
WIG20TR 3633,8 8,4% -7,2% -14,5% 31,0 14,4
mWIG40 3976,5 6,6% 1,7% -18,0% 21,0 12,7
sWIG80 16096,4 8,3% 33,6% 10,3% 61,1 14,1
S&P 500 3756,1 3,7% 16,3% 40,5% 29,5 22,6
Eurostoxx 50 3552,6 1,7% -5,1% 1,4% 52,8 18,2
Stoxx 600 399,0 2,5% -4,0% 2,5% 51,8 17,8
Topix 1804,7 2,8% 4,8% -0,7% 31,2 22,2
Hang Seng 27231,1 3,4% -3,4% -9,0% 15,7 12,5
MSCI World 2690,0 4,1% 14,1% 27,9% 33,0 21,3
MSCI Emerging Markets 1291,3 7,2% 15,8% 11,5% 25,7 15,7
MSCI EM LatAm 2451,8 11,6% -16,0% -13,3% 49,7 13,7
MSCI EM Asia 713,3 6,9% 26,0% 21,5% 26,0 16,9
MSCI EM Europe 308,4 10,2% -15,9% -10,8% 14,0 9,3
MSCI Frontier Markets 571,6 5,6% -2,4% -10,3% 14,4 12,6
Commodities
Oil Brent 51,8 8,8% -21,5% -22,5%
Copper 351,9 2,9% 25,8% 6,6%
Gold 1895,1 6,7% 24,4% 44,7%
Silver 26,4 16,6% 47,9% 55,9%
TR/Jefferies Commodity Index 167,8 4,8% -9,7% -13,4%
Bonds
US Treasury (>1 year) 2559,4 -0,2% 8,0% 16,4%
EM Government (USD) (>1 year) 961,2 1,9% 5,4% 16,0%
Polish Government (>1 year) 2035,0 0,0% 6,4% 15,8%
US Corporate (Inv. Grade) 355,1 0,4% 11,3% 25,7%
Global High Yield 422,2 2,2% 8,2% 18,4%
Currencies
USDPLN 3,73 -0,6% -1,6% 7,2%
EURPLN 4,56 1,8% 7,2% 9,2%
CHFPLN 4,22 2,1% 7,6% 18,2%
EURUSD 1,22 2,4% 8,9% 1,8%
EURCHF 1,08 -0,3% -0,4% -7,6%
USDJPY 103,25 -1,0% -4,9% -8,4%
Source: Bloomberg
1307/01/2021
Glossary of Terms
Polish Shares denote shares traded on the Warsaw Stock Exchange (WSE) and included in the WIG index
U.S. Treasuries bonds issued by the government of the United States of America; figures used for the Bloomberg/EFFAS
US Government Bond Index > 1Yr TR, measuring performance of U.S. Treasuries whose maturity
exceeds 1 (one) year
Citi Research A Citi entity responsible for conducting economic and market analyses and research, including that
concerning individual asset classes (shares, bonds, commodities) as well as individual financial
instruments or their groups
Div. Yield the amount of dividend per share over the share’s market price. The higher the dividend yield, the higher
the yield earned by the shareholder on the invested capital
Long Term a term of more than 6 (six) months
Duration a modified term of a bond, measuring the bond’s sensitivity to fluctuations in market interest rates. It
provides information on changes to be expected in the yield on bonds in the event of a 1 (one) p.p. change
in the interest rates
Short Term a term of up to 3 (three) months
Copper figures based on the spot price per 1 (one) ton of copper, as quoted on the London Metal Exchange
German Treasuries bonds issued by the government of the Federal Republic of Germany; figures used for the
(Bunds) Bloomberg/EFFAS Germany Government Bond Index > 1Yr TR, measuring performance of German
treasury bonds whose maturity exceeds 1 (one) year
P/E (12M), leading P/E a projected price/earnings ratio providing information on the price to be paid per one unit of 2016 projected
earnings per share, measured as the ratio of the current share price and the earnings projected by
analysts (consensus) for a specified period (12M)
P/E (price/earnings), the historic price/earnings ratio providing information on the number of monetary units to be paid per one
trailing P/E monetary unit of earnings per share for the preceding 12 (twelve) months, measured as the ratio of the
current share price and earnings per share for the preceding 12 (twelve) months
Polish Treasuries bonds issued by the State Treasury; figures based on the Bloomberg/EFFAS Polish Government Bond
Index for the corresponding term (>1 year, 1–3 years, 3–5 years, over 10 years)
Brent Crude Oil figures based on an active futures contract for a barrel of Brent Crude, as quoted on the Intercontinental
Exchange with its registered office in London
Silver figures based on the spot price per 1 (one) ounce of silver
Medium Term a term of 3 (three) to 6 (six) months
U.S. Corporate (High bonds issued by US corporations which have been assigned a speculative grade by one of the recognized
Yield) rating agencies; figures based on the iBoxx $ Liquid High Yield Index measuring performance of highly
liquid US corporate bonds with the speculative grade
U.S. Corporate (Inv. bonds issued by U.S. corporations which have been assigned an investment grade by one of the
Grade) recognized rating agencies; figures based on the iBoxx $ Liquid Investment Grade Index measuring
performance of highly liquid U.S. investment grade corporate bonds
YTD (Year To Date) a financial instrument’s price trends for the period starting 1 January of the current year and ending today
YTM (Yield to Maturity) the yield that would be realized on an investment in bonds on the assumption that the bond is held to
maturity and that the coupon payments received are reinvested following YTM
Gold figures based on the spot price per 1 (one) ounce of gold
Developed Markets developed countries, i.e. those characterized by relatively the highest GDP per capita, citizens’ education
(DM) levels and standards of living and also the best developed legal, regulatory and financial systems. The
following are most often included in this group: North America (excluding Mexico), Western Europe, Japan
and Australia
Emerging Markets the countries included in the developing group. Their common feature are GDP per capita levels lower
(EM) than those of developed economies (such as the U.S., Western Europe, and Japan) and often faster
economic growth. They also have less developed legal, regulatory or financial systems. From the point of
view of financial markets, emerging markets include Asia excluding Japan, Latin America and also Central
and Eastern Europe
High Yield (HY) bonds by issuers with non-investment grade rating issued by at least one of the three major rating
agencies, i.e. below BBB- for Standard & Poor’s, below Baa3 for Moody’s and below BBB- for Fitch.
Owing to the issuer’s higher risk of insolvency, they offer higher yields than investment grade bonds, and
their prices are often more closely correlated with equity markets than those of Treasury bonds
1407/01/2021
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