Anyone viewing last year’s asset class returns (see Exhibit 1 below) after having slept through 2020 would have trouble reconciling that performance with the macroeconomic backdrop of the deepest global recession since the Second World War.
Note: MSCI indices for equities; Barclays indices for government bonds and credit; BofA ML index for euro inflation-linked. (1) The NYSE FANG+ index is an equal-dollar weighted index consisting of highly-traded growth stocks of technology and tech-enabled companies such as Facebook, Apple, Amazon, Netflix, and Alphabet's Google.
In 2021, accommodative monetary and fiscal conditions look set to remain in place to prevent marginal sections of the economy from collapsing. Policymakers will continue to make every effort to forestall deflation from wrecking the global economy. Major central banks will continue to finance government budget deficits, at least until GDP growth returns to trend. Their asset purchases should put a floor under risky assets, although the resulting high valuations may limit future gains.
Over the past 50 years, recessions have generally been disinflationary events due to the slack they create in the economy. While monetary and fiscal stimulus in 2020 was extraordinary, it does not appear likely that the slack in developed economies will be eroded quickly enough to create sufficient – core – inflation to motivate a policy shift among the G3 central banks.
Our view is that inflation will rise in most countries from the currently depressed levels, but remain shy of central bank targets. Bond yields may rise, but not enough to disrupt the outlook for equities, credit and emerging market assets. The hunt for yield, be it in corporate credit or in emerging market debt, will likely remain the key focus for fixed income investors.
In 2020, the stand-out performer was big tech stocks – see the returns for the NYSE FANG+ index, the NASDAQ and the S&P Growth index. The segment has delivered strong absolute and risk-adjusted returns.
One of the key 2021 calls is whether value stocks can begin to reverse the underperformance of the last several years. The wide valuation gap versus growth stocks, the prospect of higher interest rates and ultimately an end to lockdowns suggest more upside is ahead.
- Takeaways from our investment outlook: Legacy of the lockdowns
- China’s opportunities and challenges in 2021 and beyond
- Currency outlook: The trend is not your friend
- Multi-sector fixed income – The outlook for US and eurozone debt in 2021
- Outlook 2021 – Future investment opportunities: green hydrogen
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. The views expressed in this podcast do not in any way constitute investment advice.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.