Despite the major blow suffered by the global economy on account of the coronavirus pandemic, 2021 seems to be the year of redemption and we can expect to see not only a recovery but also significant signs of growth. A connected ecosystem is expected to gain focus as we step into a new era of doing business.
The COVID-19 pandemic catapulted the majority of businesses to shift online to scale up, with small business owners waking up to the need for technology as the only path to sustained growth.
Some things turned out better than we anticipated after the pandemic. The economy — and the stock market — recovered more quickly than many had imagined during the darkest days after March when businesses first shut down temporarily in order to stem the spread of the coronavirus.
The year was not an unmitigated financial fiasco. The announcement of a successful COVID-19 vaccine in early November has led to tentative signs of a market rotation away from technology-heavy growth stocks towards more cyclical value stocks. Technology stocks received two benefits from the lockdowns. The first was the boost to earnings as consumers worked from home, spent online, and made technology purchases. The second benefit was from the decline in government bond yields.
Technology stocks are regarded as long-duration as they are expected to grow their earnings over the longer term. In contrast, the global recovery and higher bond yields should help value and cyclical stocks. Financial stocks are heavily weighted in value indices, and we expect these will benefit from higher margins as yield curves steepen, and from stronger revenues as credit growth improves.
Regarding the United Arab Emirates (UAE) economy, I expect it to gradually get back on the growth path and to contract markedly due to low oil prices, subdued domestic demand, and this economy’s significant dependence on travel and tourism sectors.
Despite significant fiscal support in 2020, with the UAE central bank extending its stimulus scheme to June 2021 to stem the COVID-19 impact and the passing of the $15.8 billion federal budget for 2021, I expect economic recovery in 2021 to be tepid. This is because of the strong possibility of subdued global economic recovery this year, which is likely to weigh on demand for oil amid a possible supply glut, as well as on the UAE’s non-oil economy which is highly integrated with the global economy.
In addition, given the significant dependence of the UAE on travel and tourism sectors, which account for a substantial percentage of the UAE’s GDP, economic activity is unlikely to reach pre-COVID levels in 2021.
Lastly, oil prices are currently hovering at around $45-46 per barrel, while I doubt if these will reach anywhere near Saudi Arabia’s or the UAE’s break-even oil price this year. As a result, lower oil prices will continue to weigh on Saudi Arabia and the UAE’s public finances in 2021.