This market did remarkably well in 2020 and almost no one noticed
Away from the headlines, two big things happened this year, says John Stepek. There was an important shift in the way governments think. And Japan’s stockmarket hit a very important milestone.
It's the time of year for forecasts; for FTSE 100 price targets; for stock tips. But as it's been such a tumultuous year, maybe it's a smarter idea to look at what actually happened in the 12 months just past – and how that might shape the year ahead.
That's what one of the analysts at Gavekal has done. And it's proved so interesting that I thought I'd share a couple of his key points with you this morning. One is about an obvious, but hugely important shift in government thinking. And the other is about a market that hit an important milestone without anyone really noticing it.
What just happened?
Rather than forecast the future for 2021, Louis-Vincent Gave of Gavekal has cast his eyes back over the biggest changes that happened this year, ones that may prove to have a very far-reaching impact in the years to come. He runs through ten points, but I just want to focus on a couple of the most interesting here.
One of the most obvious points and yet one that can't be emphasised enough in terms of its importance is the massive levels of government spending that the coronavirus crisis – and the lockdowns specifically – made necessary. What I'd emphasise is the fact that there was almost no hesitation in taking action. About a decade ago, in the wake of the 2008 financial crisis, the focus was firmly on the state of sovereign balance sheets. Austerity was never as extensive or as deep as it was painted to be, but there's no question that governments and populations in many countries were worried and felt they needed to rein in their spending.
You can argue about whether it was the right move (and bear in mind that circumstances were very different back then, and that counterfactuals are hard to come by) but I don't think you can debate whether or not the political conviction was real. Remember that the Tea Party in the US – arguably the first high-profile manifestation of today's populism in the US – was a fiscally conservative movement.
But now governments around the world (and even in the eurozone, where it's trickier to do these things) have spent unprecedented sums of money, and they haven't blinked. Having done it once with apparently only positive consequences, it's going to be hard resisting doing it again. And again. And again. As Gave puts it: "The fiscal spending genie is... out of the bottle and there is no political will in the West to stop it from 'working its magic'. Governments will thus keep spending other people's money until they run out of it. With the 'other people' being the central banks."
Anyway, this is a major attitude shift. You can call it MMT, you can call it the comeback of Keynesianism, you can even call it the return of democracy (as former Pimco chief economist Paul McCulley put it). But it does mean that the path of least resistance is extremely clear. For as long as inflation remains quiescent – or even a little bit above target – the response in future downturns will be to print more money.
Japan's quiet comeback
Gavekal makes another absolutely fascinating point about the last 12 months, which really hasn't received anywhere near as much attention as it should have. The Japanese stock market – the Nikkei 225 – is back at its 1989 high. OK, we're talking US dollar terms – but I'd argue that it's not exactly cheating to normalise an index using the global reserve currency.
This fascinates me for two main reasons. One, because even although I've also been quite positive on Japan, I'm struggling to believe it. Two, because it's clear that everyone else struggles to believe it too.
Japan is embedded in our minds as being the land that returns forgot. Value investors might be feeling a bit jaded after the last couple of years but compared to diehard Japan bugs, they've had it easy. Japan is beset with deflation, its population is getting older by the minute, its corporations are set in their ways, the government is wildly over-indebted, it's not so much a disaster waiting to happen as a shambling, undead economy in which only a fool would invest.
That's over-egging it a bit but it's not far off the mark. And for all the positive changes that we kept hearing about – corporate reform, pressure from activists to get companies to spend more and to think about their shareholders and pay the odd dividend – the country still doesn't really get much more than lip service from the investment press.
However, when you compare Japan's economic trajectory to that of every other developed nation today, it no longer looks remotely bad by comparison. Debt-to-GDP of more than 100% used to look like a scary outlier. Now it's the norm. A central bank printing money used to look like a weird, deranged experiment. Now it's the norm. And all those other weird things - yield curve control, buying shares with central bank money – are already on the menu for the Federal Reserve and its global peers.
The difference? Well the main difference is that Japan is on the path of improvement and reform now. Is that something that can be said for its global peers? I'm not so sure. As Gave puts it: "Japan may well continue to thrive, quietly and unbeknown to most investors, in such an environment."
Merryn wrote about Japan in the Christmas issue of MoneyWeek magazine. If you missed it, make sure you subscribe so that you don't miss out again. Get your first six issues free here.