Investment Outlook 2021
2020 in Review:
A Tumultuous Year
The rapid spread of COVID-19 in early 2020 caught most of the world by surprise and turned the global economy upside down.
The global lockdown during the first wave of the COVID-19 pandemic triggered the strongest economic contraction in history in Q2.
2020 witnessed the fastest bear market on record, followed by the fastest recovery ever, driven by a deluge of monetary and fiscal policy support across the US, Europe, and many Emerging Market countries.
An oil price war between Saudi Arabia and Russia at the start of the year added to the global turmoil, and led US oil prices to turn negative for the first time in history.
Brexit negotiations face-off between the UK and the EU occupied headlines throughout the year, with a deal reached in late December.
A Recap of Market
Performance
2020 is characterized by an unusual market cycle, during which, asset returns have not followed the usual playbook. Despite the worst recession witnessed since the Great Depression, global equity market returns are in the high single digits.
At a broad level, cross-asset class behaviour looked more consistent with a recession phase. Gold and government bonds have been big winners, outperforming global equities.
Other commodities and the more pro-cyclical parts of the Equity markets, such as Europe or emerging markets ex-Asia, were in the red.
Towards year end, the reduced uncertainties around the US politics and a roll out of effective vaccines further set in a more confident economic recovery tone. As a result, a risk-on sentiment environment saw the leading global benchmark indices reaching new record highs.
WHAT WE GOT RIGHT (AND WRONG) IN 2020
| Asset Classes |
Beginning 2020 |
Mid year 2020 |
Our stance |
What We Got Right |
What We Got Wrong |
|---|---|---|---|---|---|
Equities |
=
|
= | We preferred DMs over EMs, with preference for dividend yielding quality stocks in the e-commerce, technology, and healthcare sectors. In EMs, we had a preference for China. | DM equities, especially US large cap tech led the recovery. Emerging Asia delivered robust returns. | We were concerned about second wave of virus across EMs, but the impact was felt more in Latin America. |
Fixed Income |
= |
==
| We favoured high quality credit and fallen angels in developed markets, as well as select EM debt including positive bias towards GCC debt | IG bonds outperformed HY offering over 9% returns, as the Fed corporate bond buying kept volatility at bay | The much-anticipated new round of fiscal stimulus took until end of Q4 to materialize. |
Commodities |
= | = | We expected oil demand to stay below the pre-pandemic level of 100mn bbl/d and hence saw oil prices in the range of $30 to $50/bbl. We had a positive view on Gold, trading above the $1,800/oz psychological level. | Oil traded broadly in the range of $39-51/bbl. As expected, for 2020 the average consumption of 92mn b/d was below the pre-pandemic level of 100mn b/d | While we were bullish on Gold, we did not expect the bullion to breach the $2,000 mark before steadily trading around the $1,800 level in 4Q20. |
Currencies |
= | = | We maintained our downside bias on USD, while expecting emerging market currencies to stay supported; We remained broadly bullish on the EUR while expecting GBP to remain volatile | The EUR did gain on a soft USD, and the dollar was in a bear trend, as progress on vaccine and dovish Fed fuelled risk appetite. | The dollar decline was not significant enough to spur a reversal in trajectory, with all EMs currencies closing the year in the red. |
The Three Big Divergences of 2020
Stepping into Year 2021
The 2020 economic meltdown is unique, with a health crisis being at the onset of the recession. Hence the resulting market reaction and macro consequences were unique as well. We saw three main divergences emerging between winners and losers.
That said, if all goes to plan, a resolution of the pandemic through safe, effective and widely available vaccines would enable the closure of these divergences. Therefore, an important characteristic of the coming recovery is how uneven it is likely to be, with the laggard countries and industries in 2020 moving faster than others in 2021.
Major Themes Shaping 2021
Macro Outlook
2021: A Gradual Return to Normalcy…
The arrival of vaccines against coronavirus and the ongoing central bank stimulus have fuelled hopes for greater certainty in 2021
Growth should accelerate gradually in 2021 without triggering a troubling rise in inflation or interest rates, despite much higher government debt.
Emerging economies are expected to lead the global recovery, mainly China, given its successful containment of the pandemic relative to developed markets.
Meanwhile, a sustained growth is predicted to prevail in the US led by housing and consumer spending. As companies rehire workers, consumer spending is expected to rebound and activity should remain supported by overwhelming fiscal and monetary policy.
Europe’s economy is also expected to see a sharp rebound as its core economies – Germany and France- are showing signs of acceleration with marked increase in exports.
IMF has projected global economic growth to rebound at 5.2% for 2021, which likely reflects a solid growth in corporate profits in the coming quarters.
Source: IMF, World Economic Outlook and IMF staff calculations
Nore: AEs = Advanced Economics; EMDEs = Emerging Markets and Developing Economies; CHN = China
Index; 2019Q1 = 100
A partial recovery in output is expected in both advanced economies and emerging and developing economies.
With Some Downside Risks…
The major risks to the outlook include, but are not limited to:
1. Policy Mistakes
A premature withdrawal of policy support or a tweak to monetary policy is the single biggest risk for the economic outlook.
2. Lingering Uncertainty on Vaccines
Lingering uncertainty on vaccines makes for significant downside risk. Safety issues, secondary effects, duration of immunity, potential virus mutation: any of these could result in hopes of a return to normalcy being disappointed.
3. The Debt Legacy
Over the longer term, high government debt will remain a challenge for policymakers and high debt is thus likely to be one of the lasting burdensome legacies of COVID-19. Debt to GDP levels already rose by a fifth in the developed world and tenth in the developing world.
4. Deglobalization Trend
Trade barriers and frictions that have increased since 2016 are likely to stay. Tensions over technology and investment are likely to remain in place or even worsen
Regional Outlook
Going into 2021, the growth picture differs across regions. As the world economy still struggles with the coronavirus pandemic, some countries are further ahead in the recovery process. On top of the COVID-19 crisis, some countries have additional political challenges to address in the year ahead.
A swift recovery unlikely
With an unrelenting third wave of coronavirus and the long-drawn process of ensuring large-scale inoculation, US’ path to recovery is likely to be a bumpy one. Diplomatic relations are expected to undergo a change under Joe Biden’s multilateral approach, possibly re-engaging on several initiatives (Paris Agreement, WHO, WTO, JCPOA) that Donald Trump abandoned.
Post-pandemic fiscal challenges prevail
Although the region has steered clear of a second-wave, post-pandemic fiscal challenges will continue to play havoc, especially in Brazil and Mexico. The macroeconomic outlook for the two countries will remain positive contingent on Brazil’s adherence to fiscal consolidation and Mexico’s supportive monetary approach. Mid-term elections in Mexico will also remain in focus.
Fiscal support drives growth potential
Despite reeling under a second-wave across the region, the EU is poised for robust revival as fiscal support softens the economic blow, as seen by the political solidarity over the rollout of the recovery fund.
Political uncertainty drives sentiments
Even after putting an end to five years of a turbulent landscape, political uncertainty is likely to continue through 2021, especially with a potential Scottish independence referendum. In addition, a post-Brexit economic recovery could remain sluggish with added long-term costs and continuous rise in infections through the winter months.
Potential upside to oil prices to the rescue
GCC countries are set to recover from the dual shock of coronavirus and collapse in oil prices, as vaccine distribution and rebound in business activity boost fuel-demand globally. However, the record-high debt burden following the oil price shock could weigh on government balance sheets in the years to come. The pace of recovery will however differ, with UAE likely to lag behind its peers.
Tech advancement and market liberalisation on the cards
Being the only country to experience positive growth in 2020, China’s focus would now turn to becoming self-reliant in the tech space and achieving the targets of its 14th 5-year plan (2021-2025). While ruling out any significant changes in monetary policy, interest and exchange rate reform by PBoC will remain in focus.
Investment Strategy In a Post-Pandemic World
Trusting the Recovery
While 2020 was one of the most challenging years – as investors and as human beings – it is wonderful to be ending the year on a ray of hope. Positive vaccine news is a game changer, mitigating a major tail risk. With policy support measures still in place, the global economy’s recovery from the pandemic is seen extending past 2021.
Equities Remain Buoyant
While the global equity rally in 2020 was largely driven by US large cap defensive plays, and given supportive policies and the rollout of vaccine, there is a catch-up story at play. For 2021, investors should focus on small to mid-caps, on cyclicals, and on a more global exposure.
In the US, cyclical sectors – like industrials and consumer discretionary – are anticipated to catch-up with the 2020 equity market rally.
US tech giants, which led the rally in 2020, should remain in favor, as the long-term prospects for the sector remain intact.
Eurozone equities are attractive on a higher share of cyclical stocks with a value tilt.
Emerging Asia is standing out given the current containment of COVID-19 in large parts of the region, the ongoing robust economic recovery in China, and the superior growth opportunities.
Emerging Asia should benefit as well from a less confrontational US trade policy.
EM equities will be the prime beneficiaries of vaccine led recovery globally
Ongoing fiscal and monetary stimulus from governments and global central banks should support a recovery in global trade and growth. This should be beneficial for emerging markets.
Global Credit in The Sweet Spot
Credit should remain well supported in 2021, on ultra-low yield levels throughout 2021, and as spreads are expected to compress further on improving economic prospects.
A Bull Market for Commodities
Looking ahead to 2021, the commodities complex is expected to move higher driven by macroeconomic dynamics, a weaker dollar and a well-behaved supply side
In Currencies, The Gravitational Pull
Of The Dollar Fades
The arrival of a vaccine against coronavirus will likely send the dollar sinking in 2021 as confidence returns to the global economy
The US dollar having its worst yearly performance since 2017, down 6% over the year, is expected to weaken in the coming year, following:
The euro, which rose over 8% in 2020, is poised to benefit from:
EM currencies have taken a beating this year, but saw a turnaround in November as foreign investors returned. With the USD likely to extend its weakness, the fundamental outlook for EM currencies should improve in 2021.
Covid 19 A Turning Point for ESG Investing
The recent momentum observed in ESG investing is remarkable. Once a niche, ESG investing is fast growing in every geography and has become a by product of the pandemic
What is ESG Investing?
ESG (Environmental, Social and Governance) refers to a class of investing that is also known as “sustainable investing”, whereby investors seek positive returns while assessing the long-term impact on society, environment and the performance of the business.
Why the pandemic was a catalyst?
The existential and economic crisis caused by the coronavirus pandemic has sharpened minds when it comes to ensuring a sustainable financial recovery, and appears to have led to an acceleration in the uptake of ESG investments.
Recent Trends
Opportunities for sustainable investment used to be scarce, but the case is different today:
• Global assets incorporating ESG factors have doubled over four years, and more than tripled over eight years, reaching approximately USD 41 trillion in 2020.
• Nine out of 10 of companies in the S&P 500 index produced sustainability reports in 2019.
• Europe was historically the uncontested leader in sustainable finance, but its dominant position is now challenged by other region, with North America at the forefront. Asia has long been a laggard in ESG investing, but the movement is now spreading there too.
Environmental
Social
Governance
