Throughout 2020, deteriorating corporate fundamentals and global economic indicators prompted many companies to rush into the bond markets at record pace, raising historic levels of capital at record low rates in the process.
Now, flushed with cash, and heading into an improving economic environment, there is good indication that many firms will use this cash to pay down debt and improve their credit ratings. As a result, we recommend investors move into investment-grade corporate bonds, as well as selective high-yield fixed income securities, across all global regions. As the economic picture improves, we think investors would be best served venturing into high-yield and US MBS territory, given expectations for a strong economic recovery, and key global interest rates being close to zero (and even negative) until at least late 2022.
Valuations – Historically High, But Warranted
Similar to economic recoveries in the past, global asset markets will enter 2021 on the heels of post-recession rallies. This does raise the question of whether asset valuations are stretched a little too far in relation to their historic norms. Despite these concerns, we do believe that at the present moment, though elevated, asset valuations do look reasonable by a few measures, including MSCI World index relative to the Global Purchasing Managers’ Index, as well as risk premium relative to historical volatility. Further, the recent surge in COVID-19 infection rates continue to put a lid on investor sentiment. This suggests to us that the strong economic outlook we are forecasting has not yet been fully priced into the global markets.
Though asset valuations are quite elevated in some instances, that is not the case across the global markets and regions. Japanese and European assets have remained stagnant in recent years, while US assets and Emerging Markets have done very well during that same time. Though we do still see this trend continuing into the new year, we do believe investors should not ignore Japanese and European assets, and in fact given these two areas a second look in an effort to uncover hidden gems.
Growth in Global Earnings
In regards to global earnings, we expect to see them grow by approximately 20%-25% this year, with the greatest potential for double-digit returns in hard hit Developed Markets such as the US, Europe, and the UK.
Going into the new economic cycle, earnings growth could initially come from improved top-line numbers, with better margins closely following behind. Adding in additional monetary and fiscal stimulus, business re-openings, and improving consumer and business sentiment, this could all provide some additional upward momentum for global markets.
Recovery Investing 101
Given that this economic recovery will lead to a relatively “normal” economic cycle, we believe that investors should trust the dynamics of this economic recovery. Coming out of this recession, we think it pays to buy assets in areas of the economy with low expectations. This means investors should focus on buying assets in beaten down markets, sectors, and industries that were hit hard by the COVID-19 pandemic, but would traditionally benefit from a standard economic recovery. That means owning small-cap equities over large-caps equities, high-quality cyclicals assets, such as Asian, European and US assets, as well as assets in the industrials, materials, transportation, leisure, travel, and consumer discretionary sectors. Typically these areas of the economy lead coming out of recessions and contractions. In addition to this notion, this time around, additional fiscal and monetary stimulus measures will likely be more supportive for these areas once economic growth is in full-swing in the later half of 2021.
Asia: World’s Growth Engine
As it is anticipated for the world economy to take another 12-18 months before economic activity will return to normal, for inflation to pick up, and employment levels to recover, policy normalization does not appear to be on the horizon for many Developed and Emerging Market countries anytime soon. As such, going into 2021, in addition to vaccine availability, investors will be driven by the fundamental trajectory of various regions and countries, and their respective sovereign balance sheets.
Based on this scenario, we believe that as market participants will be in search of returns, income, and yield, global investors will be drawn to Asia next year, with a specific preference for countries and regions with strong economic fundamentals and solid growth potential. Based on our research, such countries include China, India, South Korea, Vietnam, Singapore, and Indonesia. Further, some central banks in Asia will be accommodative in 2021, with countries such as India, Indonesia, and Malaysia having room to ease, with bond yields in these countries drifting lower this year, as global investors rush into these capital markets in search of yield.
“Smooth Sailing Ahead?” – 2021 Investment Strategy Outlook
As 2020 has drawn to a close, we take a look at investment themes that could prove beneficial for investors in 2021.
What’s in Store for 2021?
The financial, economic, and social risks stemming from the COVID-19 pandemic won’t suddenly disappear come January 2021, however, from an investment perspective, 2021 could offer a welcome change in the current investment climate: a return to normalcy.
Pivotal to our 2021 investment strategy outlook is the current pace of the economic recovery, where we estimate that global GDP will grow at 5.15%, supported by Emerging Markets and Developed Markets, growing at 6.04% and 3.92% respectively, this year.
Going forward, based on this outlook, we expect to see earnings grow at approximately 20-25% across major global equity markets, as well as significant declines in corporate leverage, both of which are key reasons for our call for investors to be overweight global equities and investment-grade credit vs. cash and government bonds.
Portfolio Positioning for 2021
Looking ahead, here we see the top investment themes investors should be mindful of when positioning their portfolios for this year:
Chasing Yield
Throughout 2020, deteriorating corporate fundamentals and global economic indicators prompted many companies to rush into the bond markets at record pace, raising historic levels of capital at record low rates in the process.
Now, flushed with cash, and heading into an improving economic environment, there is good indication that many firms will use this cash to pay down debt and improve their credit ratings. As a result, we recommend investors move into investment-grade corporate bonds, as well as selective high-yield fixed income securities, across all global regions. As the economic picture improves, we think investors would be best served venturing into high-yield and US MBS territory, given expectations for a strong economic recovery, and key global interest rates being close to zero (and even negative) until at least late 2022.
Valuations – Historically High, But Warranted
Similar to economic recoveries in the past, global asset markets will enter 2021 on the heels of post-recession rallies. This does raise the question of whether asset valuations are stretched a little too far in relation to their historic norms. Despite these concerns, we do believe that at the present moment, though elevated, asset valuations do look reasonable by a few measures, including MSCI World index relative to the Global Purchasing Managers’ Index, as well as risk premium relative to historical volatility. Further, the recent surge in COVID-19 infection rates continue to put a lid on investor sentiment. This suggests to us that the strong economic outlook we are forecasting has not yet been fully priced into the global markets.
Though asset valuations are quite elevated in some instances, that is not the case across the global markets and regions. Japanese and European assets have remained stagnant in recent years, while US assets and Emerging Markets have done very well during that same time. Though we do still see this trend continuing into the new year, we do believe investors should not ignore Japanese and European assets, and in fact given these two areas a second look in an effort to uncover hidden gems.
Growth in Global Earnings
In regards to global earnings, we expect to see them grow by approximately 20%-25% this year, with the greatest potential for double-digit returns in hard hit Developed Markets such as the US, Europe, and the UK.
Going into the new economic cycle, earnings growth could initially come from improved top-line numbers, with better margins closely following behind. Adding in additional monetary and fiscal stimulus, business re-openings, and improving consumer and business sentiment, this could all provide some additional upward momentum for global markets.
Recovery Investing 101
Given that this economic recovery will lead to a relatively “normal” economic cycle, we believe that investors should trust the dynamics of this economic recovery. Coming out of this recession, we think it pays to buy assets in areas of the economy with low expectations. This means investors should focus on buying assets in beaten down markets, sectors, and industries that were hit hard by the COVID-19 pandemic, but would traditionally benefit from a standard economic recovery. That means owning small-cap equities over large-caps equities, high-quality cyclicals assets, such as Asian, European and US assets, as well as assets in the industrials, materials, transportation, leisure, travel, and consumer discretionary sectors. Typically these areas of the economy lead coming out of recessions and contractions. In addition to this notion, this time around, additional fiscal and monetary stimulus measures will likely be more supportive for these areas once economic growth is in full-swing in the later half of 2021.
Asia: World’s Growth Engine
As it is anticipated for the world economy to take another 12-18 months before economic activity will return to normal, for inflation to pick up, and employment levels to recover, policy normalization does not appear to be on the horizon for many Developed and Emerging Market countries anytime soon. As such, going into 2021, in addition to vaccine availability, investors will be driven by the fundamental trajectory of various regions and countries, and their respective sovereign balance sheets.
Based on this scenario, we believe that as market participants will be in search of returns, income, and yield, global investors will be drawn to Asia next year, with a specific preference for countries and regions with strong economic fundamentals and solid growth potential. Based on our research, such countries include China, India, South Korea, Vietnam, Singapore, and Indonesia. Further, some central banks in Asia will be accommodative in 2021, with countries such as India, Indonesia, and Malaysia having room to ease, with bond yields in these countries drifting lower this year, as global investors rush into these capital markets in search of yield.
Conclusion
As we step into 2021, given our 2021 Investment Strategy Outlook, investors should be mindful of these key themes for next year, and in doing so, position their portfolios in an effort to benefit from a post-pandemic rebound.
Market Commentary
“V for Victory?” – 2021 Global Economic Outlook
Related Portfolio Solutions
For clients who are interested in our recommended countries and regions, please refer to our Country and Regional Portfolio Solutions.
For clients who are interested in our recommended sector and industry, please refer to our Sector and Industry Portfolio Solutions.
For clients who are interested in our recommended income recommendations, please refer to our Income Portfolio Solutions.
For clients who are interested in our recommended global macro recommendations, please refer to our Global Macro Portfolio Solutions.
© 2020 Economics Global Inc.
Content Disclaimer
Any views expressed here are those of Economics Global Inc. as of the date of this publication, are based on available information, and are subject to change without notice. This document does not 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.