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With the end of 2020 looming, many investors may be looking at their portfolio to see if any strategic overhauls are needed in 2021. In doing so, many factors need to be taken into account to see what the macroeconomic drivers are likely to be next year. The most obvious example would be how the impact of the American election could change the investment climate or how a workable COVID19 vaccine could affect the stock markets.
However, whichever viewpoint investors take on either of these ideas (amongst many others), the idea of volatility must be taken into account when formulating an investment outlook. 2020 was characterized by a high level of uncertainty and high market volatility as a result. But is it here to stay? And if so, for how long? Here, we argue a number of points that will impact how volatile markets will be in 2021.
The strong rebound of the markets in early November on the back of news released from Pfizer about its COVID19 vaccine goes to show how important getting the virus under control is for economies and businesses around the world. However, no vaccine, as yet, has been approved. Plus, with the need to vaccinate a huge proportion of the worldwide, markets are likely to be sensitive to any data released from Pharmaceutical companies regarding vaccine production.
COVID19 forced even the biggest economies around the world to borrow money on a colossal scale. While debt remains to be cheap, those borrowing costs will still amount to a huge burden on even G7 countries. With the level of debt proportionate to GDP rising, a cloud of doubt will continue to hang over the investment world. Plus, more leveraged economies also struggle to spend as much on infrastructure which has rippling impacts down the supply chain. Finally, another impact on volatility could be that governments have less in their arsenal to steady markets should there be another unforeseen shock like we have had in 2020.
While the question of who won the American election has arguably been answered in 2020, which should help minimize some volatility, there are still many worldwide events that could potentially wreak havoc on the markets. For example, the Brexit negotiations continue to plague the Eurozone, while American China tensions remain sky-high. Such events are felt keenly on the markets, and with lawsuits looming on the confirmation of the American election result, volatility is still likely to continue into the first quarter of 2021.
High market volatility is often seen around times of uncertainty. For that reason, 2020 looks set to be a prime example of how the world backdrop can materially affect every aspect of economics as well as every investable market. That’s not to say though, that market volatility diminishes returns. In fact, many investors see market volatility as a good opportunity to make healthy portfolio growth. To do so, a full understanding of the factors that affect market volatility is key - as well as how those factors impact specific investment decisions.
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