Finance in 2021: the challenges and opportunities left behind in 2020

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Even though the New Year has been here for some time, new trends continue to emerge in the world of finance. The biggest challenges and opportunities of 2021 are all based on phenomena and policies initiated in previous years. Of course, what lies ahead is much less certain than some analysts seem to believe. Still, it’s worth it for investors to look at and prepare for what to expect in the coming months – or reap.

For many reasons, most people’s eyes weren’t on the financial world for the past two or three quarters. This does not apply to investors and analysts – who know the 2020s well powerful bull market. As always, the predictions were commonplace around December. The financial sector certainly cannot remain an enclave of peace and prosperity for long in the midst of collapsing economies. Indeed, the challenges and opportunities of 2021 are based on phenomena and policies initiated in 2020 – as we will show. Yet, for now, what lies ahead is much less certain than some analysts seem to believe.

It’s worth taking a quick look at what’s to be expected in the coming months. The main challenges ahead are: 1) a boom in non-performing loans (NPL) and 2) a possible spike in inflation. The continuation of the bull market is a risk that can turn into an opportunity to be reaped.

Non-performing loans are behind the curve

In economic and banking jargon, a loan becomes “non-performing” when it meets specific conditions. According to International Monetary Fund a loan becomes an NPL when:

  • There are at least 90 days of unpaid down payments and / or interest;
  • “[I]Interest payments equal to or greater than 90 days have been capitalized, refinanced or delayed by agreement ”;
  • The creditor has “other good reasons […] to doubt that the payments will be made in full.

Empirically, an NPL is a loss for the creditor in most of the cases. By the end of 2020, debtors in the developed world are able to maintain their obligations thanks to official aid. Yet “bankruptcies and defaults up sharply in 2021 as […] The government’s funding and forbearance programs are coming to an end. Non-performing loans are already exploding in weaker economies like the Philippines, Kenya and India. Meanwhile, the EU already recognizes them as problematic. And the numbers in the United States and China are equally worrying.

Of course, “NPLs can become efficient again after awhile. “But it’s a risky bet. Right now, performing loans are much more likely to become NPLs than NPLs to be performing again. In that sense, between the NPLs of the Great Recession and these new NPLs, there is a fundamental difference. The first one overlapped mainly with “NINJA”Loans – that is, loans to households with No income, no jobs or assets. Most of the time, banks never fully collect these debts because they are unsecured and the debtor has no collateral. In contrast, new loans usually turn into NPL because the creditor has lost his source of income due to anti-pandemic policies. Either way, no short-term solution seems to be in the works yet.

Inflation: “Not enough” can become “Too much”

One concern clouding the hopes of investors with portfolios of all sizes is a resurgence of inflation. The stated predisposition of central banks to refrain from above target price growth rates we and Europe is a worrying factor. At the same time, what is called bottlenecks on the supply side can lead to overheating of the economy.

A bottleneck is a congestion point in a production system (such as an assembly line or computer network) that occurs when workloads arrive too quickly for the production process to handle.

The growth in savings rates in large economies can be interpreted as suppressed demand or a form of forced savings. This phenomenon was widespread in fixed-price economies such as the USSR, where it then led to sustained hyperinflation. Once the external constraint for people to save more – i.e. anti-contagion policies – diminishes, the money could flow. The result would be an unprecedented rise in inflation well beyond the 2% target pursued by the ECB and the Fed.

However, according to the most optimistic predictions, the “inflation blow” will probably be “”temporary”. In fact, the real economy is underperforming, as shown by the huge production gaps. This means that after a short shock, productive capacities will align with the level of aggregate demand, thus eliminating excess inflation. In the meantime, inflation will interact with the markets and “raise stock prices, not hold them back”.

Too high, too fast … but it doesn’t stop

As mentioned, 2020 has been an incredibly positive year for stock markets around the world. It was also the year that every analyst seemed to repeat a mantra on this point. During the past year, the expression the stock market is not the economy was pronounced thousands of times. Critics have come from both sides of the ideological spectrum. Yet 2020 ended on a high note thanks to fringe phenomena such as Robinhood Trade”. Through these ‘gamify“Investment platforms, people left at home by closures could access the stock market and reap certain benefits from it. The fashion behind ‘Robinhood’ investors has spread beyond the United States, reaching as high as India.

However, the runoff does not work. A Nobel laureate noted that “[o]optimism about Apple’s future earnings will not pay the rent for this month. “As stocks skyrocket, the real economy suffers and the middle class is shipwreck in poverty. Despite this contradiction, the stock markets appeared to be on an upward trajectory and performed well in 2020. This was the case for two reasons.

The fact that the recession has harm small unlisted companies more than large listed companies is part of the story. The other is the scarcity of yields offered by bonds.

For this to continue in 2021, there are a few prerequisites. First, the policies of governments and central banks should continue to support economic activities – which is unlikely despite OECD suggestions. Second, inflation must remain a distant dream – or a nightmare. Finally, the debt burden mentioned above should not weigh on corporate finances. In the words of a professional broker: “The longest lifespan of this bubble is late spring or beginning of summer. “

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