After an unprecedented international response to an enormous exogenous shock, coverage stays the driving power for economies and markets in 2021 – and traders should reset their portfolios for a brand new actuality.
The pandemic’s arc and its impression on political and coverage developments are resetting expectations and can proceed to outline the funding panorama.
The interaction of those “three P’s” – the pandemic, politics, and coverage – could have implications for portfolio allocations extending far past the approaching 12 months, resetting expectations for all the pieces from rates of interest to asset valuations.
PineBridge Investments has gathered insights from Chief Economist Markus Schomer, World Head of Multi-Asset Michael Kelly, World Head of Credit score and Mounted Earnings Steven Oh, and World Head of Equities Anik Sen on what traders may anticipate in 2021 and past, find out how to place amid volatility and unpredictable market situations, and the place to faucet alternatives arising from the disruptions we’ve seen and can doubtless proceed to see.
Financial outlook: Coverage takes the reins
The Covid pandemic has strengthened and accelerated the shift towards policy-driven market regimes that we highlighted in our outlook final 12 months, with huge financial and monetary stimulus the important thing to bridging the hole to restoration. Politics – notably elections, which may quickly shift coverage targets – pose the best danger in a policy-driven market surroundings, and following the pivotal US presidential election, Brexit and upcoming contests in Germany and France are developments to observe.
We imagine international development expectations could also be beginning to flip after contracting steeply earlier in 2020. The Worldwide Financial Fund (IMF) dropped its forecast for the world economic system from 2.9% in January 2020 to -3% in March and -4.9% in June, however has since revised its forecast to -4.4% – nonetheless a steep decline, however an indication that expectations are bettering.
In our view, we’re in a brand new enterprise cycle the place development is reacting to mechanical closings and reopenings of the economic system, making conventional forecasts largely backward-looking and fewer significant. Our most well-liked development measure seems to be on the charge of change in GDP between fourth-quarter 2020 and the identical interval in 2019, the final “Covid-clean” quarter.
Our year-over 12 months forecast for the GDP-weighted developed world common development is for a 3.8% contraction in fourth-quarter 2020, with international locations together with the US (-2.4%), Japan (-3.2%), and South Korea (-2.1%) anticipated to outperform the peer group common. The truth is, Taiwan is the one economic system on this group anticipated to recoup its recession losses earlier than the top of the 12 months. Because of this, these international locations are more likely to expertise slower financial development in 2021 as they converge extra shortly to a extra regular GDP development development.
In the meantime, international locations with bigger recession gaps, similar to Canada (-6.6%), Singapore (-6.8%), and the UK (-9.2%), will stay within the mechanical section of the cycle for a extra prolonged interval and can doubtless expertise stronger development charges subsequent 12 months. Nevertheless, critically, that won’t be a sign that they’re rushing away from their friends, however quite an indication of how far behind these economies are within the strategy of returning again to regular, fundamentally-driven development charges.
Multi-asset outlook: New cycle, new coverage combine, new market leaders emerge
The perfect returns sometimes happen within the first a number of years of recoveries, and we see a sustainable restoration in its early phases for economies and markets, constructed upon the rebooting of financial stimulus, enough fiscal stimulus to get the job finished, and a rare scientific response to Covid-19 that may doubtless quickly produce an efficient vaccine – a course of that took roughly one 12 months as a substitute of the traditional 4. We anticipate a brief slowing, assuming whole lockdowns of unknown period don’t return, and an above-average 12 months in 2021 for many danger asset returns.
Because the pillars supporting a restoration show endurance, a sustainable early-cycle enlargement ought to emerge, broadening out the fairness rally. US shares, which had benefited from narrowing into secular winners plus defensives, are more likely to cede their management (whereas nonetheless performing in keeping with international shares), whereas choose Asian in addition to European markets start to take the lead.
With Asia’s sturdier hand in coping with the virus and the strongest financial prospects heading into 2021, we expect Asian funding grade (IG) credit score might also present a few of the greatest risk-adjusted returns from right here.
Credit score segments backstopped by the Federal Reserve, together with US company funding grade credit score, have shortly returned to truthful worth after rallying earlier in 2020. Non-backstopped credit in lots of international locations stay enticing, nevertheless, and rates of interest above native inflation can nonetheless be discovered in lots of rising markets.
Gold and different actual property might grow to be the most important benefactors of shifts towards a extra balanced coverage combine and away from the purely financial deluge, with fiscal lacking in motion, that characterised coverage up to now.
Mounted earnings outlook: Vivid spots for markets on the pandemic, politics, and coverage
Political developments and the pandemic’s course closely affect coverage outcomes, and none of those elements might be considered in isolation. However for mounted earnings markets, the extraordinary affect of world central banks – the Federal Reserve specifically – and their huge and rising financial stimulus for 2021 could have the best impression. Relating to stimulus, the expectation of a a lot smaller fiscal bundle mixed with a Fed that may most definitely lengthen most of its packages ought to restrain further yield curve steepening triggered by vaccine optimism. We subsequently anticipate a extra incremental steepening to play out in 2021, as a lot of the anticipated impression has been pulled ahead.
These developments will doubtless yield a set earnings market in 2021 that’s supportive of credit score danger, enjoys higher relative fundamentals in rising markets (notably for Asia credit score), and sees continued range-bound authorities bond charges, albeit with an incremental steepening bias.
Due to this fact, our positioning headed into 2021 has been tilted to credit score danger, with a relative bias towards Asia and rising market credit score. Inside developed markets, we stay constructive on each funding grade (IG) credit score, notably BBBs, and below-IG leveraged finance credit score, favoring single-Bs.
We proceed to hunt safety choice alpha from dispersion and divergent dangers and alternatives, notably throughout choose Covid-impacted corporations.
We additionally see worth in “buying and selling the vary” on the longer finish of presidency yield curves, with the view that yields will rise solely incrementally with transient intervals of volatility.
The main secular shift we anticipate in 2021 is the reducing of danger premia, a development that’s more likely to persist for no less than 5 years on account of central banks’ long-term adoption of a destructive actual coverage charge bias and their curtailment of draw back tail dangers.
Equities outlook: Pent-up demand factors to a robust 12 months forward
Close to the shut of a tumultuous 12 months by which Covid-19 delivered probably the most extreme exogenous shock ever to hit international economies and markets, equities as an entire are nonetheless ending increased than the place they began. That is due to swift actions by corporations to shore up liquidity, together with daring responses by fiscal and financial authorities and the event of vaccines in file time. But a lot of the fairness return in 2020 has ridden on a handful of mega-cap names on the prime of the indexes, which poses each dangers and alternatives and factors to a extra stock-selection-driven market to faucet potential alpha.
Whereas Joe Biden’s US presidential win eliminated a key supply of uncertainty for fairness markets heading into 2021, questions on US Senate management, the pandemic’s trajectory, the worldwide coverage response, and the timing of a coronavirus vaccine all might transfer markets within the months forward.
We imagine a number of tailwinds will assist propel fairness markets within the 12 months forward, together with the discharge of pent-up demand, which heralds a extra stock-selection-driven market in 2021 and a transfer away from the slim, “seen development” market of 2020.
We additionally anticipate fairness markets to be supported by the nascent improve in market breadth and the start of a elementary restoration, together with persevering with fiscal and financial enlargement. We imagine increased earnings revisions and rising valuations may even buoy markets.
Relative to different asset courses, equities provide among the many largest funding home windows into the highly effective modifications shaping society and the world. These embrace rising client affluence in China and India, accelerating adoption of digitalization, a ramp-up of the economic funding cycle (with a concentrate on effectivity and local weather), and the breakout internationally of worldwide aggressive corporations from regional markets.
Whereas shifts in information and sentiment will doubtless proceed to maneuver fairness markets within the coming months, we expect 2021 is poised to be an opportune time to spend money on probably the most promising corporations of right this moment and tomorrow.
For extra views on what to anticipate throughout economies and asset courses in 2021, go to PineBridge’s 2021 Funding Outlook.