Predicting the future is such a dangerous business. Every single person who predicted the year 2020, got it entirely wrong. The Financial Times’ prediction for the year gone by, 2020, did not even carry a single mention of COVID-19. Not one. Zero. Zilch.
Almost every single prediction from PWC’s “Predictions for 2020” turned out to be wrong. They expected the global economy to expand at a pace of 3.2% (It contracted by about 4.5%). They said 2 Million jobs will be created in the G7 economies (800K jobs were lost last week alone in the US). Oh, they also said India is expected to rise in global economic rankings (quite the opposite happened).
It is easy to look at all these egregious (outstandingly bad) predictions and mock at them. But the reality is this.
- Nobody has a crystal ball to see through the future. Shockingly, not even us! 😉
- As the guy who made a lot of money selling bumper stickers in the movie Forrest Gump would say, “(Sh)It happens”.
But no matter, a whole host of think-tanks, intelligence houses, economists, thought leaders (even us) and astrologers alike, have made predictions for 2021. So, why then do we do it when we are so often so wrong? An article published by Psychology Today 10 years ago suggests that one of the most powerful influences on fear is uncertainty. The less we know, the more threatened we feel. Lack of knowledge means we don’t know what we need to know to protect ourselves. This is bad for us. Our psychological need to feel in control consequently takes over and exhibits a characteristic called ‘Futurism’ where we predict what will happen in the future to deal with the uncertainty associated with the lack of knowledge.
More importantly, predicting the future enables us to devise a plan of action. For instance, our predictions for the year 2021 help us develop an investment plan. Of course, things will change, and our portfolio will have to evolve. But we will worry about that in the future. Not now!
Enough of faff, here is what are expecting will happen in 2021!
Our Predictions for 2021
1. Interest rates in India will go further down
The RBI has maintained the REPO rate at 4% since May 2020. While this is the lowest rate we have seen in a long time, we expect that this will go down even further in 2021. Inflation in the most recent quarter was more benign than before, thanks in large measure to the easing in lockdowns and the consequent supply chain unblocking. As decongestion in supply continues, inflation will come down to levels within the RBI’s tolerance bands. But GDP growth pressure will increase, and the central bank will have no choice but to reduce interest rates further. After all, when central banks across the world are flirting with negative interest rates, the RBI will not want to be seen as the only one increasing interest rates and acting anti-growth in current climate.
2. The NIFTY banking index will be the worst performer in the stock market in 2021
The moratorium on loans announced in 2020 by the government to support individuals and MSMEs has to a large extent helped avert a banking crisis. But the slowdown in economic activity in the country has merely postponed this issue. As we go into the second/third quarter of this year, we expect more pressure to build up on businesses should the economy not recover smartly. And when that happens, a lot of outstanding loans will have to be classified as non-performing assets by banks. The combination of low-interest rates, availability of enormous amounts of liquidity, increased risks in corporate lending and the expected surge in NPAs will not augur well for banks this year.
3. The USD will depreciate against most currencies, specifically against the AUD
This is right up there in our list of predictions for 2021. The FED has created so much new money in the system that it is now officially unsustainable. Come to think of it, the Bank of Japan and the Bank of England have also done the same. But the reserve currency in our world today is not the GBP or JPY. It is the USD. The last decade was characterised by an appreciating USD and depreciating commodity prices. We expect a reversal to start happening from this year. The USD will depreciate while currencies of commodity-driven economies like Australia (AUD) will appreciate.
4. Cryptocurrencies will have another fab year - Bitcoin will continue to scale irrational heights, digital Euro and digital RMB will also be in demand
We can’t quite nail down why this is to a single factor. But a combination of factors like including
- the slow loss of confidence on central banks issued fiat money,
- the slow dethroning of gold as a safe-haven asset,
- the significant rally we saw in Bitcoin last year, and
- the assertion & acknowledgement of the cryptocurrency as a medium of exchange by technology giants (like PayPal)
has increased the appeal for cryptocurrencies more than ever. But Bitcoin is not entirely where the action will be this year. The digital Euro & the digital Yuan will all be in demand.
5. Put a pin on electric cars, electric motorcycles are going to be the big thing this year
Electric cars are the future, alright. There is no denying that. But this year is going to be the year of electric motorbikes. Ather’s electric bike is retailing for just over Rs.1 Lakh. Ola is now putting $327M on the table to build the world’s largest e-scooter facility in India. It says their e-scooter will retail for less than Rs.1 Lakhs. Okinawa Autotech, a Gurugram based e-motorbike maker is throwing in $28M to increase their production capacity. The government’s FAME2 subsidy policy for e-scooters, the low per kilometre running cost (Rs.0.1 compared to Rs.1.4 for petrol vehicles) and the increasing awareness amongst people is going to boost sales for these disruptors. This happened in China over the last two years, this will happen in India this year. (We know of at least one Chinese electric two-wheeler maker whose share price went up by 8X just this year)
6. Demand and price of copper will increase significantly in 2021
The net long positions in copper are at a historic high. And for a good reason. A traditional ICE car contains about 20Kg of copper. An electric car on the other hand contains about 3 times that. World bank’s 2017 report titled “The Growing Role of Minerals and Metals for a Low-Carbon Future” shows, demand for metals, including copper, could rise tenfold by 2050 if the world moves towards a low-carbon energy future. Is the world moving towards a low-carbon energy future? Without a doubt it is. The increased consumption of electronics, EVs, renewable energy sources are all going to increase demand for the industrial metal. We have seen a rally in copper prices this year and we expect this rally to continue in 2021. Along similar lines, we expect the price of lithium, nickel, silver and cobalt to also increase significatly this year.
7. Globally, and amongst major economies, equity returns will be the highest in China
China may not be the world’s most favourite country right now, but the world will have to live with it. The country may be the only major economy to post positive GDP growth in 2021. The massive demand for personal protective equipment from across the world pushed Chinese exports even higher than pre-COVID levels in 2020. While that may change in 2021, the country is looking inward to stimulate consumer demand and competition amongst businesses. They are making friends with the outside world too – RCEP countries, European Union, Sri Lanka! While the most recent annual CPPCC (Chinese People’s Political Consultative Conference) did not set a GDP growth target for 2021, we expect that China will post positive GDP growth figures in high single digits in 2021 from its 2019 base.
8. Real estate price appreciation in India will finally start recovering
Real estate investors have had a rough few years. Price appreciation has not even caught up with inflation over the last decade. But this year may just change that. Supply is correcting itself across the country. Interest rates are low and could get lower. Household formation continues to increase as the Indian demographic is second to no other country in the world. This year, 2021, the cyclical slowdown in real estate may just come to an end with prices starting to see moderate appreciation. Bargains hunters will do well to stay on the look-out for good properties in good locations.
9. Forget value or cyclical stocks. Momentum and Tech investing will continue to be where the action is.
A lot of investors are saying it is time to book profits in tech stocks and switch over to value stocks or cyclicals. We think these investors are going to be sorely disappointed, this year too. Value has underperformed growth/momentum-based investing for a long time now. And this year isn’t going to change anything. Tech stocks will continue to be where most of the action will be. The composition of the tech universe which will witness an increase in earnings momentum may change from 2020. For instance, Facebook is running out of ad space on the platform and may find it challenging to grow revenue at the same pace. Kodak or Canon may see an increase in demand with the revival of tourism while Shopify/Zoom may see lower revenue growth with return-to-normal. But the bigger trend is going to continue – Tech companies are changing the way we live, and their stocks will be recognised for this.
10. The western countries and Japan will witness inflation, finally!
Countries in the western world and Japan have been struggling to bring inflation up to 2% levels for a really long time. But this might just happen in 2021. Or at least that is what the surveys are saying. Given extremely low bond yields & weak developed market currencies, positive inflation will only weaken investment results in the west. This has major consequences for capital flows between countries. If inflation expectations continue to remain high in the west, a lot of money will flow out of developed markets to emerging markets in search of better yield. We saw some of this happen in 2020, but a lot more of this will happen into 2021. What this means for us in India is that low bond yields and expensive stock market valuations are here to stay.
Other outrageous predictions we came across, if you are interested...
- Nostradamus predicts a Zombie Apocalypse
- Simpsons also predict an apocalypse at Springfield
- Saxo Markets predict a new form of fusion energy
- The guys at CNN predict Borat Subsequent Moviefilm will win the Oscars in 2021
- Bloomberg predicts that the only real prediction for 2021 is ‘there will be surprises’.