Oliver Mangan: Amid the worst pandemic for 100 years, global stocks are up 10%

Official interest rates are either very close to zero or negative in the main economies, with central banks, including the ECB run by Christine Lagarde, also engaging in enormous bond purchase programmes. File photo: Daniel Roland/AFP

This year was always going to be challenging for investors following the stellar performance across virtually all asset classes in 2019 that yielded very handsome returns. 

And then 2020 has witnessed the biggest global pandemic in a century and the deepest global recession since the Great Depression and you would have been very fearful about the performance of nearly all financial assets.

However, as 2020 draws to a close, it has turned out to be yet another year of strong performances across most markets. 

Global stock markets are up by more than 10%, 10-year bond yields have declined by a further in major economies and credit spreads have tightened even more, while gold is up by over 20%.

Meantime, although oil prices are down by over 20% as a result of the pandemic, non-energy commodity prices are up by some 10%. Commercial real estate has had a difficult year, but residential property prices have generally been stable or have risen.

In terms of stock markets though, it has not been a uniformly strong performance and Covid has certainly had an impact. Chinese, Japanese and US stock markets are up by 12% to 15% in 2020. 

On the other hand, the Ftse-100 is down by 13%, while the Eurostoxx 50 has fallen by 5%, largely reflecting the fact that the Covid-19 pandemic had a particularly severe impact on the UK and eurozone economies.

There have been very large share price gains in certain sectors that have benefitted from Covid, such as technology and pharma, while the negative impact of the pandemic can be seen in falling stock prices in travel and hospitality. 

Overall though, it has been another good year in most financial markets.

However, after the strong performances in recent years, there are concerns that we may now be in bubble territory in stock, bond, and credit markets. 

US stock market valuations look very stretched, bond yields are at historic lows with negative yields now the norm in nearly all eurozone sovereign debt markets, and credit spreads are exceptionally tight.

Financial markets are being sustained at these elevated levels by the extremely loose stance of monetary policy. 

Official interest rates are either very close to zero or negative in the main economies, with central banks, including the ECB run by Christine Lagarde, also engaging in enormous bond purchase programmes. 

How will the coronavirus vaccine affect economic recovery? Where do we stand after nine months of fighting the crisis? What’s the role of the ECB’s monetary policy? Tune into the #TheECBPodcast with Chief Economist Philip R. Lane and host @MichaelSteen https://t.co/YclAdupDBS pic.twitter.com/lXrO9WVjeh

— European Central Bank (@ecb) December 18, 2020

So what could upset the apple cart and cause monetary policy to change course? 

Central banks have indicated that a strong rebound won't trigger tightening even though inflation will still bear close watching. There is a risk that with the continuing disruption to supply chains caused by Covid that inflation could pick up more quickly than expected. 

It is a small risk, but one that would have major consequences for financial markets.

• Oliver Mangan is chief economist at AIB