“Optimism is in the air – and for good reason,” says Luca Paolini, chief strategist at Pictet Asset Management giving his outlook for 2021.
“Better treatments are now being deployed in the fight against Covid-19 and there is a growing possibility of effective vaccines being available in a matter of months.
“This improves the prospects for a recovery in the global economy and corporate profits. Yet it will take a long time to return back to pre-pandemic normality. Next year will be only the start of the transition.
“One thing is clear: emerging markets will lead the economic recovery in 2021, propelled by China and supported by a weaker US dollar.
“A recovery in the job market and record levels of household savings should lift consumer spending worldwide. Investment will also get a boost from rising profits and maintenance cycles.
“Investors should also expect the environment to become a greater priority in 2021 – fuelling growth in sectors like clean energy. Biden’s victory in the US election will provide further momentum to this shift.
“Across the globe, green investment will be a key part of fiscal stimulus packages, feeding into a strong and synchronised economic recovery.”
Equities
“The recovery from the Covid-19 pandemic should provide a strong boost to global stocks in 2021.
“World stocks gains will be in lower double digits in 2021, but those gains will mask a significant divergence in regional markets.
“The resilience of China‘s economy will continue to be a positive force. Hence, Chinese stocks should be among the leaders next year too.
“Support will come in the form of continued stimulus from Beijing. China is likely to be the only major economy with an expansionary fiscal policy next year —its “fiscal thrust”.
“In contrast , all other major economies will tighten the fiscal reigns in 2021, having delivered huge stimulus throughout this year.
“Japan is poised to benefit from its neighbour’s strong economic recovery, as well its own effective response to the pandemic.
“It has a higher relative weighting than others in cyclical sectors such as industrials and autos, and is well placed to benefit from a revival in global trade and capital spending as the world re-emerges.
“Elsewhere, we expect emerging equities to benefit from China’s V-shaped recovery and a weaker dollar.
“Risks from persistent Covid cases will weigh on US and European markets, but the ambitious climate agenda of US President-elect Biden, and Europe’s green new deal, should see environment-related industries, such as clean energy, outperform.
“Cyclical stocks that are sensitive to a recovery in capital spending –industrials and materials, should benefit from pent-up demand to upgrade plant and equipment. They give exposure to global reflation without the secular and ESG headwinds that weigh on banks and energy stocks.
“Tech companies are less likely to repeat their stellar performance of 2020 – they are the most expensive sector after consumer discretionary.
“Without a strong pick up in inflation and bond yields, it is premature to fully rotate from growth stocks to unloved “value” companies such as banks.”
Fixed income
“Even if we expect the global economy to recover strongly from the ravages of the pandemic in 2021, the surge in GDP growth is unlikely to lead to a sharp sell off in developed market government bonds.
“Central banks won’t take any unnecessary risks in absence of a sustained rise in inflation, which is years away in our view.
“Both the ECB and the Fed will do whatever is required to keep policy accommodative and ensure a self-sustaining recovery.
“Inflation will remain low next year, below target, but the combination of strong growth, rising commodity prices and low rates will feed through to a moderate pickup in inflation expectations.
“So investors should expect to see only a very gentle rise in nominal government bond yields in 2021, but also brace for a fall in real yields.
“The return of inflation could boost US Treasury Inflation-Protected Securities (TIPS) to outperform all developed market nominal bonds.
“In a year that will see healthy growth and increased international trade, emerging market local currency bonds should fare well, being one of the very few fixed income assets yielding above 4 per cent.
“Adding to their investment appeal is the prospect of a strong rally in emerging market currencies – which should unfold as the global economy recovers and as trade tensions ease.
“Chinese renminbi debt should have a particularly strong year –benefiting from its attractive yield compared to developed world bonds and its increased presence in mainstream bond benchmarks.
“Developed market credit has mixed prospects. High yield bonds, already expensive, could perform less well than assumed whilst investment-grade corporate bonds are more appealing.
“2021 doesn’t promise to be a good year for the dollar in the face of a synchronised global economic recovery and the prospect of a surge in the US budget deficit and intervention from the Fed.
“Gold should resume its rally – possibly to USD2,000 by end-2021. Continued quantitative easing by central banks, a weaker dollar and real rates dipping further into negative territory should all underpin its demand.”
