Investments

Stock Markets- Optimistic Against All Odds


Alain E. Roch, MBA

President and CEO

Alain.Roch@bluebridge.ca

 

Optimism comes from God, and pessimism is born of the human mind.”

– Sufi proverb

 

 

In this time of turmoil, when we are all inundated with information of varying relevance and subject to harsh social restrictions, it’s hard to see the light at the end of the tunnel and believe that we will see economic recovery and a return to “normalcy” in 2021.

As Christine Lagarde, President of the European Central Bank (ECB), recently said, one way of preserving a degree of optimism despite the current circumstances is simply to think back to the ECB’s projections released in September 2020 and the multiple uncertainties envisoned. What were the salient facts back then? The terms of the final Brexit deal were not yet known; The risks of a no-deal exit were still present, for both the European Union and the United Kingdom. On the pandemic front, no vaccines had been found and it was impossible to predict with certainty when they might become available. The US elections, of crucial importance for the whole world, had not taken place. All of these major uncertainties have now been resolved, notably the most important one of all – the availability of reliable vaccines. That’s a new situation and it’s certainly a reason to be optimistic.

Admittedly, the economic outlook remains highly uncertain and institutional investors are holding a big chunk of their assets in cash. Institutional investors may be reluctant to reinvest in risky assets before the end of the year and a return to some normalcy supported by tax policies.

In the meantime, things may become chaotic. Central bank stimulus seems infinite despite dramatic state deficits. While stock markets overlook this burgeoning massive debt, it is reasonable to assume that it may draw the economy into a deflationary spiral in the absence of a rapid economic recovery.

Many hope that government debt will be cancelled altogether. But central banks, and the ECB in particular, have already vigorously rejected that notion. More preferable, is the elimination of public debt incurred to secure the post-coronavirus crisis economy through economic growth driven by recent government investments targeting key sectors and higher taxes. This is true even if taxation’s impact on the gross domestic product (GDP) growth rate is questionable: some studies have found that an increase in the corporate tax rate and/or consumption tax negatively impacts the GDP growth rate and does not generate higher tax revenues.

The way in which international organizations and states have managed the pandemic not only triggered a paradigm shift; it also accelerated some transitions. We are moving towards another economy, more digital, greener, and more committed to climate change. The way we work will also change, and public health will definitely be part of our reference points.

At Blue Bridge, a wealth manager and family office that creates value for its clients, we believe that 2021 will be a year of recovery. The economic recovery has been delayed, but not interminably. We do not expect a solid recovery until the middle of the year, and we are not immune to risks as yet unknown. In any event, let’s stay objective:  Economic activity will not return to pre-pandemic levels before mid-2022.

 

“Interview with Christine Lagarde, President of the ECB”; Marie-Pierre Gröndahl and Hervé Gattegno; February 7,2021; ecb.europa.eu

L’appétit des institutionnels pour le risque en berne”, Salima Barragan, February 9, 2021, allnews.ch

Christine Lagarde refuse d’annuler la dette européenne,” Etienne Meyer-Vacherand, February 8, 2021, letemps.ch

L’impact du mix fiscal sur la croissance économique des provinces canadiennes, 1981-2010; Pouya Ebrahimi, François Vaillancourt, Rapport de projet, February 2012, CIRANO©

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By ALAIN E. ROCH, MBA

17/02/2021

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