Remarkable, painful, unsettling, hopeful… 2020 brought a roller-coaster ride of emotions, not to mention its share of economic and market volatility. So, with the US elections pretty much behind us, further US fiscal stimulus on hold (for now), and COVID cases spiking in the US and Europe (but with progress toward a vaccine), what’s our investment thesis for 2021?
Over our 12-month horizon, the promise of more good news on the vaccine front, along with gradually reopening economies and strong government policy support, make us more confident that we’ll begin to see the global economy recover from still-depressed levels. We believe the improving economic backdrop and the prospect of a safe, effective vaccine should be catalysts for a turning point in the market narrative — a broad, durable rotation from growth assets into their value counterparts. This could well be an enduring theme going forward.
Global equities: Leaning toward value
We expect a range of value-type equity exposures to outperform in 2021, including overseas developed markets (Europe and Japan versus the US), emerging markets, smaller-cap stocks, and cyclical sectors (such as financials) versus growth sectors. In addition to financials, sectors we find attractive include consumer discretionary, health care, REITs, industrials, transportation, and aerospace/defense, all of which have value characteristics.
US equities: Lowering our stance to neutral
This is largely because the US equity market is currently dominated by relatively expensive growth and technology stocks. We think the arrival of a vaccine in 2021 will unleash pent-up demand that could make value plays more attractive. The US economy, which has been hit hard by COVID, should rebound as it reopens, benefiting US equities overall, but particularly cyclical, value-oriented areas of the market (Figure 1).
Seeing some opportunity in credit markets
Credit spreads have narrowed recently, but are still around median levels versus their history. Given the US Federal Reserve (Fed)’s unprecedented support for credit markets, we think spreads should continue to grind tighter. The structured credit market, while not a target of the Fed’s credit programs, offers exposure to the strengthening US residential housing market — a dynamic we expect to persist in 2021.
Diversifying with MBS and high-quality bonds
We believe agency mortgage-backed securities (MBS) and high-quality government bonds can potentially enhance portfolio diversification and liquidity if the economic recession proves to be longer or deeper than widely expected. Additionally, we think taxable investors should consider tax-exempt municipal bonds given their relatively attractive valuations.
Further diversifying via precious metals
With today’s rock-bottom fixed income yields, we think precious metals can play a role in further boosting portfolio diversification and mitigating the effects of a potentially “stagflationary” environment marked by geopolitical uncertainty.
Staying mindful of the risks
Downside risks to our outlook include the threat of broader, more stringent economic lockdowns (if COVID takes a turn for the worse); a potential spike in interest rates; and mounting geopolitical tensions during the US lame-duck session. Upside risks include another major dose of fiscal stimulus, particularly in the US.
Want to go deeper?
To learn more about our latest market views and thoughts on asset-class implications for the next 6 – 12 months, please see our 2021 Multi-Asset Outlook: Is the market rotation for real?