In my conversations with clients at the end of 2020, many of the same questions kept coming up. Here are five that topped the list, along with my thoughts in response.
#1: Given last year’s robust market gains and the current state of the economy, how optimistic are you about 2021?
There are always risks for investors to navigate. Notably, this latest surge in COVID-19 cases, hospitalizations, and deaths marks a tragic phase in the ongoing global health crisis. However, as we learned in 2020, markets are forward looking. I believe the recently approved COVID vaccines, gradually reopening economies, and easy fiscal and monetary policy should provide a supportive backdrop for potentially solid gains from risk assets in 2021. So optimism seems in order, but given that is the consensus view, I am only moderately bullish on global equities as of this writing.
#2: What’s your take on what a Biden presidency might look like?
Many investors are concerned about a progressive Biden agenda. However, the president-elect’s razor-thin majorities in the House and Senate and a low likelihood of removing the Senate filibuster have dimmed chances for proposals like the “Green New Deal” and “Medicare for All.” That said, any major budget legislation would likely include another large COVID relief package focused on state and local aid, expansion of unemployment benefits, and stimulus checks for lower-income individuals. I expect higher taxes too (corporate and individual), but probably not until 2022 to avoid choking off the economic recovery. Biden will have more unilateral power on foreign policy.
#3: Do you think the unprecedented government policy actions have ratcheted up inflation risks?
Inflation risks have risen amid prospects for improved economic growth, a weaker US dollar, supply-chain bottlenecks, and higher commodity prices. However, I don’t expect these dynamics to hurt markets this year because there is still substantial slack in the economy, as evidenced by higher-than-normal unemployment. I also tend to think equities would better withstand rising inflation if it were induced and accompanied by stronger growth.
#4: With yields so low these days, what’s the value in fixed income?
Around 75% of global government debt is negative-yielding right now, so it’s not unreasonable to think fixed income offers no value. But I disagree. Fixed income would still play a valuable diversification role in the event of a large equity sell-off. Suggestions to supplement fixed income allocations with value or high-dividend stocks are suspect in my opinion, as such exposures would only add more equity risk to a portfolio. I prefer widening the universe of diversifiers beyond traditional bonds to include cash, gold, global government bonds, and high-quality credit. I expect credit spreads to continue tightening this year.
#5: Which equity style is likely to win this year — value or growth?
I expect the upturn this year to benefit value-oriented markets and assets over their growth counterparts. A range of regions, sectors, and market caps are likely to outperform in my view, including international over US equities, cyclical over defensive sectors, and smaller caps over larger caps. Why now? Because we have a catalyst in the form of safe, effective COVID vaccines that should help persistently cheap valuations to “mean revert.” Growth assets still deserve a place in client portfolios over the long term, but I think the “reopening bounce” in favor of value will be a dominant theme for 2021.