Welcoming 2021: part 2

The new year is fast approaching, and this extremely long break for UK financial markets has given us all time to try and decipher what will be in store for financial markets when we get back to work. Here we take a look at four themes that we think will dominate 2021 in the first few months. 

1, Banking stocks and dividends 

The dividend theme could be big news in 2021. The Bank of England allowed UK banks to restart paying dividends earlier in December. This is in contrast to the ECB, who have asked European banks to withhold from paying dividends until at least September 2021. Thus, we could see some arbitrage trading going on, with the UK’s financial sector outperforming their European rivals in 2021. Although the BOE has put guardrails up, limiting the amount that banks can distribute in dividends to shareholders, even moderate dividends could be greeted with investor enthusiasm, since there has been such a dearth of dividends from the financial sector in the past year. Lloyds Banking Group and Barclays could be the better dividend plays, with analyst estimates for their dividend yields at 1-3% respectively. Thus, the UK banking sector could be one of the better performers in 2021, which would be good news for the overall FTSE 100.

2, Stock indices to watch in 2021

2020 was all about the tech sector, and the US tech sector in particular. US indices reached their highest ever levels and there were some amazing IPO debuts for new tech kids on the block. We will talk more about some of them below, however, our view is that 2021 could see some appreciation return for the overlooked stocks of 2020: the financial sector, energy and mining and retail stocks. We have three reasons for this: 1, dividends could boost some banking shares, particularly in the UK, although less so in Europe. 2, retail sales could explode once the UK and other nations emerge from their latest lockdowns. If the vaccine roll-out is quick in the UK, then we could see a swift resumption of growth in the second and third quarters of 2021. Those who have managed to keep their jobs or stay furloughed will have amassed significant savings over the past 9 months, this could be used to fuel a retail spending binge. It could also help airline stocks. IAG remains two thirds below its peak in January 2020, yet we expect that a swift vaccine roll out for the UK could herald record numbers of flights taking holiday-starved English men and women abroad for a few weeks in July and August. Thus, we could see airline stocks make a longed-for recovery at some stage in Q1. Airlines could also respond well to the Astra Zeneca/ University of Oxford vaccine approval, which we expect will be confirmed in the next day or so. Ryanair, the low-cost carrier, has used some of its cash to boost its purchase of slots for next summer, stealing a leg up on its rivals. This has been rewarded with a full recovery in its share price. Partly this is down to expectations that Ryanair will outperform the budget airline sector in 2021, and partly this is due to the outperformance of the Irish stock exchange in 2021. We don’t think that this will last, as the FTSE 100 comes roaring back, Ryanair could be at risk, while IAG could be the stock to buy on the cheap. 

3, GBP – what next for the Brexit-addled pound? 

In part 1 of this series, we noted that GBP/USD was one of the forecasts that we got right in 2020. We expected it to hit $1.35, it was a roller coaster ride, but we got there in the end! For 2021, we could see GBP/USD hit $1.40, as long as the UK economy fights back and the roll out of the vaccination programme speeds up. Although the pound’s initial reaction to the Brexit trade deal was underwhelming, this gives the pound a good foundation for further strength in 2021. $1.3620 and then $1.38 are key resistance levels to watch out for in GBP/USD. EUR/GBP could also come under pressure, and we could see a return to 0.88, ahead of a longer term down trend back towards 0.83, the low from February. While there is still some work to be done on the UK/EU trade deal, particularly around services, the trade deal means that there is now a stable base for the UK’s relationship with the EU, which we expect to mean a stronger pound in 2021. 

4, Why 2020’s IPO darlings may struggle in 2021 

Airbnb had a fantastic IPO that smashed expectations earlier this month, likewise, Door Dash beat expectations and Snowflake also had a decent IPO back in September. Interestingly, all of these IPO Darlings have experienced some degree of struggle in the second half of December. Low global interest rates made these IPOs extremely attractive, thus, for their share prices to recover in 2021 we need to see interest rates remain low, or for investors to expect them to remain low, for the medium to long term. While we doubt that the Fed will be raising interest rates any time soon, we do think that a weak dollar, combined with a fiscal spending binge by the Biden administration, could see the Fed scale back its support for financial markets later in 2021. Thus, Biden’s win in the US election could be the ultimate buzz kill for the newly listed tech stocks mentioned above. Added to this, while every IPO seemed to skyrocket in the latter months of 2020, this is not normal behaviour. Some of the newly listed companies will do well, some won’t. So, you’ll need to make your mind up if you like newly minted tech giants – will it be Airbnb or Door Dash in 2021?