After a terrible year for everyone, 2021 promises to be a turning point. It doesn’t feel that way right now with the terrible news of rising Covid cases and deaths, but the ambitious vaccine programme now underway has the potential to dramatically improve the situation, reduce the effect of the virus and get the economy back on track. The Brexit deal signed in the final days of 2020 also provides hope that international investors will return.
With hope on the horizon, I’ve decided to share my take on where the economy is heading in 2021, where investors might look to invest, and where they might avoid.
According to forecasts compiled by the Treasury, it’s expected that the UK’s GDP will expand by an average of 5.4% this year, marking the biggest leap forward for the economy in modern history. The Bank of England’s forecast is even more optimistic, expecting growth of 7.25% in 2021. Of course, much of this is dependent of the vaccine roll-out allowing everyday life to get back to something that looks like normal.
Alongside the growth forecast for the UK’s GDP, investors will also be pleased to hear that Blackrock expects equities to do well over the next 6-12 months, with tech and healthcare poised to benefit from the pandemic’s transformative shifts.
For income investors, 2020 was a painful year with UK dividends falling by 50% in Q3. Dividend yields in the oil and gas sector saw some of the biggest falls. The combination of a global supply glut and Covid driven collapse in demand pushed oil prices to historic lows which resulted in dramatically reduced dividends. Demand is expected to rise in 2021 but with air travel due to remain subdued for much of the year, it will remain relatively low.
Bank stocks also saw their yields fall in 2020 with financial institutions not paying dividends in order to protect their balance sheets. This, however, is expected to be short lived, although with the Bank of England capping dividend payments at 25% of profits, or 0.2% of risk-weighted assets, many banks will be prevented from paying out as much as they were pre-pandemic.
Looking at the housing market, throughout last year the market showed itself to be resilient and adaptable. The adoption of technology to introduce virtual viewings helped property professionals overcome the challenges Covid-19 presented and kept the market going. In fact, in 2020 buying, selling and letting activity reached record highs. This was partly due to pent-up demand which meant transactions piled up towards the middle of the year as well as the stamp-duty holiday introduced by the Chancellor which likely brought forward sales as people rush to take advantage of it before the 31st March deadline.
In 2021, however, transactions are expected to slow. Along with the end of the stamp-duty holiday, Help to Buy becomes less widely available from 31st March and an extra layer of stamp duty will kick in for overseas buyers. But while transactions are expected to slow, there is no suggestion that prices will drop. The government’s support measures are expected to cushion the worst of the unemployment risk and prevent widespread forced selling. But for investors looking to make a quick return, property won’t be the answer. Economists expect property prices to remain fairly flat, perhaps rising marginally if the economy recovers more quickly than expected.
Thinking about possible areas for investment, it may seem obvious, but it would be remiss of me not to include online retail. The online retail-sales boom that took hold in 2020 remains far from over. Shopping online for goods and services is very much part of the “new normal”, which means the e-commerce market remains primed for further growth. According to Statista research, global retail e-commerce sales totaled $3.53 trillion and is expected to grow to a staggering $6.54 trillion in 2022.
Cloud infrastructure too is another winner to come out of the pandemic. While businesses were already sharing data via the cloud prior to 2020, the pandemic has accelerated the trend and demonstrated the importance of cloud infrastructure. And while Amazon already dominates much of the market with its cloud infrastructure platform, Amazon Web Services (AWS), with the expected growth and size of the market, there is space for smaller players.