The year ahead – what to expect from major markets in 2021

Investors have had to endure a lot in 2020, with many asset classes initially sent reeling by the Covid pandemic, before rallying in the face of an unprecedented series of stimulus packages from central banks and governments around the world.

From negative oil prices to record levels for gold and US equities, 2020 has been anything but run of the mill for investors.

With a new President set to take the helm in the US, Brexit, environmental concerns and sprawling government debt piles, there are lots of new challenges for investors as we head in to 2021, but also lots of opportunities.

Below, Franklin Templeton’s specialist investment managers look at what is facing major asset classes next year (each day different specialist investment managers tackle different asset classes)

US equities – ClearBridge Investments (Scott Glasser, Co-CIO and Portfolio Manager)

We have a moderately positive view for equities in 2021. Volatility has come down since the election to a level where we do not expect to see significant spikes in the VIX like markets experienced early in the pandemic, or significant declines.

Investor sentiment and earnings forecasts for the first half of 2021 have become a bit exuberant, which will likely lead to consolidation and perhaps a slight correction early in the new year. Longer term, markets should head higher as the economy normalises with the distribution of a vaccine and adjustment to a new presidential administration in the US.

Based on a green expansionary signal for the ClearBridge Recovery Dashboard, we also believe that a durable economic bottom has formed, providing further support for equities, which tend to perform strongly coming out of recessions. 

The approval and distribution of a COVID vaccine is critical for the market and economy to get back on track. Positive vaccine results from three separate drug candidates in November immediately boosted the outlook for cyclical stocks, a broadening of market leadership that should continue into 2021.

We believe the cyclical and value-oriented sectors most severely impacted by the pandemic shutdowns look the most attractive. We expect the greatest increases in earnings growth will occur in these areas, as they will benefit from easier year-over-year comparisons and improving sentiment. The market has already responded to this anticipation for improvement and should continue to do so.

In addition to taking on a more cyclical bias in 2021, we believe it’s important to continue to maintain exposure to these technology disruptors that are transforming the economy. A more balanced market should lessen the index concentration of mega cap growth stocks and we expect the equally weighted S&P 500 Index will outperform its market cap weighted counterpart in the year ahead.

Infrastructure – Clearbridge Investments (Nick Langley, Portfolio Manager)

We see a lot of infrastructure projects being accelerated as governments look for opportunities to support local economies, stimulate the job market and support small and medium sized enterprises.

We will see a diverse range of ‘local’ projects using local materials, aggregates, labour and contractors. Expect a number of these projects to be financed by the private sector and “paid for” by extending concession agreements (neutral to earnings but accretive to value and often missed by the market).

Utilities are an infrastructure sector we feel bullish about for 2021 as it was hardly impacted by the pandemic due to its essential service nature, accommodative regulators, importance in leading the decarbonisation of economies and social importance as major employers. A variety of trends will support asset growth and subsequent earnings, cash flow and dividend growth in the medium and longer term. These include higher renewable energy targets, gas to electricity switching (in residential as well as commercial), build out of electric vehicle charging infrastructure, and building grid resilience against climate change.

We also see opportunities in the transport space as governments use the new pandemic-normal to try and change consumer behaviour when it comes to travel; for example, Europe is promoting 2021 as “the year of rail.” There will be an opportunity to invest in long-dated, monopoly assets, like Eurotunnel. Additionally, we expect US policies to support the on-shoring of supply chains that will benefit rail infrastructure across North America.

Finally, the pandemic has accelerated planning for the roll-out of 5G communications infrastructure. This will enhance the medium- to long-term earnings growth amongst the wireless tower industry, which is well represented in listed markets across the US, Europe, Asia and the emerging markets.