The extraordinary sequence of events that unfolded in 2020 from virus outbreak to lockdowns, then from large-scale stimulus to vaccines, produced unusually broad market gains for most asset classes in absolute terms.
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.
Looking ahead
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.
Also read:
- 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
