World news – AU – The key takeaways for global markets in 2020

A year like no other for most of us around the world will be remembered in the US and international financial markets for five notable traits:

Apart from a few weeks in the 2020 market lows from 23 Peaked in March, stocks managed to stave off a drastic collapse in global economic activity with significant immediate and longer-term consequences

This incredible decoupling has shown no signs of slowing, even with markets trading at historically elevated valuation levels. If anything, an already exceptional year-end disruption has widened

Stocks have broken record after record as economies grappled with another wave of COVID-19 hospitalizations and deaths Credit: NYSE

Stocks have hit record after record as economies have grappled with yet another wave of COVID-19 hospitalizations and deaths, the most surprising in terms of the intensity and speed of spread, while also leading the way to vaccines Herd immunity made explanations difficult

Unless, like me, you firmly believe in the overwhelming impact of adequate and predictable liquidity on the markets from central banks, particularly the Federal Reserve and the European Central Bank, it has been difficult to come up with a lasting explanation and forecast this year’s extraordinary price moves in the financial markets

Indeed, market action has not resulted in narratives leading to market action, but rather in a series of consensus statements that have often been found to be serially inconsistent

I can think of several examples, including the three conflicting political narratives that market participants largely took up mid-year to “explain” the steadily rising stocks: High prospects for President Donald Trump’s re-election with an agenda for lower taxes and less regulation; a divided government that would incapacitate them and allow businesses to flourish unhindered by interference; and a blue wave (Democratic Party) that would lead to huge fiscal stimulus that would significantly boost demand

This year, investors experienced illiquidity in the largest and most traditionally liquid markets and liquidity in normally illiquid segments, in particular, March will be remembered as the moment when even the flows of US Treasuries, the benchmark of all global benchmarks, are strong were disturbed

A few weeks later, the Fed’s intervention in the markets, including surprise purchases of high yield securities, led to liquidity far and wide and caused “cross-over” investors to stray far from their normal living space

By the end of the year, deep belief in an everlasting “central bank put” had led to the most underestimated of all the risks investors face, those associated with liquidity

The more central banks have succeeded in stifling market returns on “risk-free” government bonds (and facing investors with little to no income and disadvantageously asymmetrical price risk), the more investors have sought new and more attractive ways to mitigate risk – So much so that a growing number of market commentators took their cue in 2020 on the likely death of the traditional 60/40 reverse convertible portfolio

Many investors, particularly those with negative government bond returns, have ventured into other areas of the bond market to offset the risks associated with their sizeable equity positions

What started out as buying investment-grade, short-dated bonds – assuming the Fed put it under a protective umbrella with its own purchase – has evolved to include significantly higher-value debt Risk of failure such as Yield and some emerging market bonds

Others have taken more of a basket approach, adding gold, bitcoin and other cryptocurrencies to what was traditionally just government bonds

Emerging Markets Are in Perfect Economic Storms Due to COVID-Related Disruptions Due to the “sudden stop” of the global economy and the subsequent geographically uneven recovery, many have collapsed export revenues, lost tourism revenues and evaporated foreign direct investment inflows, with some evaporating even had the prospect of drains

However, with the exception of countries with pre-existing conditions such as Argentina, Ecuador and Lebanon, the vast majority of emerging markets avoided debt defaults and significant restructuring as liquidity quickly returned to financial markets and investors were urged to aggressively seek higher returns issued a record level of EM bonds with exceptionally low risk spreads and total returns
Taken together, and contrary to what most around the world have seen, these five factors add up to a year where investors have got much of what they could want – especially in terms of attractive returns with particularly low volatility outside of a few weeks around March that seem to be quickly forgotten

They are also factors in favor of the dominant market influence of central banks, which anchors an unhealthy, interdependent relationship that most investors, regardless of the diminishing benefits for longer-term economic and financial well-being, want to continue together with increasing collateral damage and the Spread of unintended consequences

This column does not necessarily reflect the opinions of the editors or Bloomberg LP and its owners

Mohamed A El-Erian is a columnist for Bloomberg Opinion. He is President of Queens’ College, Cambridge Principal Economic Advisor at Allianz SE, the parent company of Pimco, where he was CEO and Co-CIO; and Chairman of Gramercy Fund Management His books include “The Only Game In Town” and “When Markets Collide” ‘

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2020