Barclays says markets ‘rightly’ optimistic on growth and tips S&P 500 to hit 4,000 points next year

Barclays and HSBC buildings are seen amid the outbreak of the coronavirus disease (COVID-19), in London, Britain October 20, 2020.

Matthew Childs | Reuters

Markets are right to be optimistic about the global economic outlook in 2021, with growth returning and inflation rising below central bank targets, according to Barclays Head of Economics Research Christian Keller.

In its 2021 outlook, the British lender has projected global GDP (gross domestic product) growth of 5.6% in 2021, rebounding from a 3.6% contraction this year, with most Western economies reaching so-called herd immunity from Covid-19 in the second and third quarters of the year.

The forecast is rosier than that offered Tuesday by the OECD, which expects a sharper contraction of 4.2% this year, followed by a 4.2% expansion in 2021.

Speaking to CNBC’s “Street Signs Europe” on Wednesday, Keller said his forecasts reflected the recent slew of positive vaccine results with efficacy rates exceeding expectations, which point to a significant boost for growth in the second quarter of 2021. He also suggested the inflation outlook would not indicate any unwinding of current unprecedented levels of central bank support.

“Labor markets are recovering but we are still at very high unemployment, so there is undeniably a lot of slack in the system,” Keller said.

“That means that when it comes to core inflation and the underlying drivers, to wage costs etc., that was unlikely to happen in the short run, meaning even next year. It would take several years really to come back.”

Keller noted that while Barclays anticipates a gradual improvement in inflation, it will not be significant enough to cause central banks to consider tightening their accommodative monetary policy stances.

“This is why markets are quite optimistic, and rightly so. We have an environment whereby growth comes back, inflation stays relatively muted, and you have central banks continuing to support the recovery, and tightening is still far out,” he concluded.

Barclays equity analysts have already issued their 2021 outlook, projecting a rally for European stocks in 2021 on the back of earnings-per-share growth, as the vaccines start to bring the pandemic under control.

The British lender tips the S&P 500 to surpass the 4,000-point mark in 2021 and European equities to notch record highs, while the benchmark U.S. 10-year Treasury yield is expected to rise to 1.25%.

The S&P 500 closed Tuesday’s session at 3,662.45 points and the 10-year yield was at 0.9277% as of Wednesday afternoon trading in Europe.

“We remain overweight risk assets over core bonds, as investors look through the near-term drag of the winter COVID surge and focus instead on a resilient global economy and a faster return to normalcy in 2021/2,” Barclays Head of Macro Research Ajay Rajadhyaksha told investors in a note Wednesday.

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