After a year that many would rather forget, investors will be hoping that 2021 is a year of financial and economic recovery.
But interactive investor’s head of markets, Richard Hunter, has questions about what that will look like.
Below, Hunter highlights the eight ‘RECOVERY’ areas that he will be paying particular attention to next year.
Release of the UK from the EU
First on the list, is ‘release of the UK from the EU’ and the resolving of ongoing uncertainty regarding Brexit, according to Hunter. But with less than a month to go until the ‘Brexit transition period’ ends it remains unclear what a deal would look like, if any.
“The release of the UK from the EU removes a potential obstacle, even if the economic prospects make for ugly reading,” Hunter said.
Alleviating this uncertainty will allow investors to see some of the attractive elements to the UK market.
“If a Covid-19 vaccine can be manufactured and distributed early, and if the conclusion of the Brexit talks result in an outcome which does not place undue further pressure on UK companies and therefore the economy, the resultant effect would be positive,” he said.
“This would also lead to the question of whether investors who are currently searching for value elsewhere globally can be tempted back to the UK.”
Another pull for investors to the UK market would be the return of appealing dividend yields after many were cut this year, said Hunter.
“In addition, and on valuation grounds alone, the FTSE 100 looks cheap compared to many of its global peers,” he said. “Of course, none of this is guaranteed and while the FTSE 100 is arguably overdue its day in the sun, the currently cloudy outlook needs first and foremost to clear significantly.” 
Economic repair
Positive vaccine news wouldn’t just help the UK market, but would be a key part to an overall ‘economic repair’ theme, according to Hunter (pictured).
He said: “With central banks and governments still underpinning markets, to a large extent the roll-out of a pandemic vaccine is the last piece of the jigsaw to economic repair.
“This could have many positive implications, such as for the banks.”
Hunter said an improvement in economic conditions could reduce the billions assigned by banks for impairments, boosting balance sheets and “provide a compelling case for a return to the payment of dividends.”
China/US relationship
The next element is the ‘China/US relationship’, an issue which Hunter said may have “levelled off”, with Joe Biden’s presidential win, but has not gone away completely.
Although markets could expect a more traditional foreign policy to play out under the Democrat the relationship is still in need of some significant repair.
“It remains to be seen whether the new president will be more conciliatory, or whether the damage has been done both in terms of public opinion and some real sticking points, such as human rights,” he said. “The fact that the world’s two largest economies may remain at loggerheads could be unsettling for investors and could accelerate the reverse of what had been a strong trend towards globalisation generally.”.
Online – accelerated structural shifts
One thing everyone will have experienced in the pandemic is an abrupt change to their daily habits and enforced change in behaviours.
And with a return to a ‘new normal’ looking closer now, Hunter said it remains to be seen whether the structural shift to online – for work, for leisure and everyday life, generally – will continue in to 2021.
“As we emerge from the pandemic, it will begin to become evident how much of the enforced change to our behaviour is actually here to stay,” Hunter said. “It should also prove whether online has seen accelerated structural shifts.”
Vaccine
Positive vaccine news will provide “a boost to sentiment towards the end of this year” although the focus will shift to distribution early in 2021.
“Not only would a roll-out in the early months be positive in crippling the pandemic, but it would also allow economies to regain some footing and companies to recoup some previously lost earnings,” said Hunter. “Conversely, delays due to the regulatory bodies, doubts on the vaccine’s efficacy or a slower than expected distribution would threaten investor sentiment.”
ESG
One of the major themes of 2020 has been increased focus and investment into ESG; (environmental, social & governance), which Hunter said is likely to continue in 2021.
“Next year is likely to see ESG becoming fully entrenched, rather than a separate animal, in investment terms,” Hunter said.
Confusion surrounding the definition of sustainable investing still needs to be clarified, Hunter added, as well as companies clearly outlining its commitments to ESG investment to alleviate greenwashing issues.
Out of the three areas Hunter said that governance should become a more central topic next year, as the pandemic has highlighted the importance of good business practice to be a successful company.
Risks
Potential ‘risks’ will feature more prominently among Hunter’s thinking next year, and after a rare global pandemic, investors may have to think about some of the least likely possibilities.
For example, US tech valuations could be a risk to investors with regulators taking a closer look under a new administration, he said. Meanwhile, Hunter said the risk of withdrawing monetary stimulus too soon could jeopardise the fragile economic recovery and needs to be carefully managed.
“While markets will be hoping to avoid another ‘black swan’ event next year that doesn’t mean there won’t be risks in 2021,” he added.
Year-on-year comparisons
Finally, ‘year-on-year comparisons’ will be another area of focus for the interactive investor head of markets.
“The first quarter of 2020 was partly affected by the pandemic in the month of March, with January and February having been reasonably strong months,” he said.
“By the same token, it is unlikely that companies will have been able to recover by the first quarter of 2021 and comparisons will therefore be less positive.”
And while the second quarter might be a much stronger comparative quarter for markets, the third quarter could be tougher because of the nascent recovery seen in Q3 2020.
Hunter added: “With the second wave currently having a further economic impact and will some stimulus packages dropping away, Q4 2021 should compare favourably with the final quarter of this year.”