So far, 2020 has been a washout year for the FTSE 100 index. The index was down 22% in September compared to January. While some recovery was seen in the months following the stock market crash, it proved to be weak and uneven. But I think there’s still a whole lot to look forward to as we go into 2021. Here are three macro trends that could flip the mood back to optimism in the next year.
#1. V-shaped recovery
Monthly economic data has already shown recovery. The Bank of England has long been optimistic and expects a V-shaped recovery. Continued policy support in the form of the jobs support scheme, stamp duty holiday, and financial support to struggling businesses can continue to drive growth for now, until the economy finds its own stability. In other words, any impending broad-based economic disaster could have been averted even if it takes a while for the economy to start booming again. I’d consider FTSE 100 cyclicals like retailers JD Sports Fashion and luxury brands like Burberry to buy into the recovery, in the UK and elsewhere.
#2. Coronavirus vaccine
While all of us would hope it were sooner, according to The Guardian’s latest report, a vaccine could be available as early as next year. Another coronavirus surge in the UK is a mood dampener. The markets aren’t happy with the US President Donald Trump, contracting it either. But on the whole, progress has been made and FTSE 100 companies are at the forefront of vaccine development. AstraZeneca is one example. It’s already ahead, and if it reaches the finish line, the already coveted stock will add another feather to its cap. At the very least, better control on coronavirus is possible by then, which should give some more breathing space to travel and hospitality stocks like International Consolidated Airlines Group and Intercontinental Hotels Group.
#3. FTSE 100 stocks’ dividends return
Many FTSE 100 companies suspended dividends earlier this year and some were explicitly encouraged to, like banks and insurers. However, a few months later, some companies have already started paying dividends again. Stocks with some of the biggest dividend yields, like BT and Lloyds Banks, may not be back in the fray yet, but others like house-builder Persimmon are. Its level of dividends is lower than it was earlier, but the fact that it has brought them back makes me optimistic that they will grow overtime. I think as more companies regain confidence to pay dividends, investors will return to the stock markets as well.
Risks to FTSE 100
That said, risk exist too. We don’t know what the outcome of the US elections will be. In so far as the world catches a cold when the US sneezes, we should watch out for this one. There’s also the Brexit hot potato. A lot rides on how things turn out in the negotiations. All in all, though, there’s much reason to look forward to 2021, even if right now it may not look like it.
