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 into 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)

Global fixed income – Brandywine Global (Brian Kloss, Portfolio Manager)

Based on current valuations and a belief that the global economy will reopen as society adapts to living with COVID-19, investors should find opportunities across the lower-quality segments of the corporate credit market, namely among BBB, BB, and B-rated bonds.

Sectors that have a more cyclical tilt, like autos and mining also look attractive as we are heading into 2021. These cyclical sectors should see marked improvement as the economy rebounds from the lockdowns.

Furthermore, they will be supported by monetary and fiscal stimulus, which should provide a floor under credit markets.

The underlying economic conditions of the eurozone pose a risk to euro-based investors. Given the revised outlook on the economy and the ECB’s various programs, such as its pandemic emergency purchase programme, the currency has probably put in a short-term high. Euro investors should consider looking toward more developed emerging market currencies, particularly those with commodities or exports exposures that stand to benefit from a cyclical upturn as the global economy recovers.

Monetary policy in the US and globally has not been able to reach its targeted goal of 2% inflation. Central banks have since embarked on a new regime where they will allow inflation to run “hot.” When the large-scale asset purchase programs are coupled with this new regime, there is a risk that inflationary pressures may mount. However, that’s not a near-term expectation, in our view. Although we do not envision a significant back-up in yields, we would advocate reducing the spread duration of a portfolio in positions that have reached or traded through fair value.

International equities – Martin Currie (Zehrid Osmani, Portfolio Manager)

As governments globally have been easing lockdown restrictions and stimulating economic activity, investors are still trying to predict what shape the recovery will take.

Our predictions are for increased market volatility given the uncertain shape of the economic recovery, bringing a healthy bull-bear debate to the market. The shape of the economic recovery in our view will depend on five aspects: (1) length of renewed lockdowns; (2) what a post-lockdown world looks like, as it is unlikely to be a return to the old normal both in terms of shape of demand and of supply, given that social distancing will still be in place for some time; (3) the speed of channelling policy stimuli into the economy will determine the magnitude and pace of the recovery; (4) the potential downside impact of any negative feedback loop of weakening labour market on the demand outlook; and (5) pandemic relapse risk which could dictate how rapid a recovery will be.

We forecast a gradual economic recovery, rather than a V-shaped one, with a possible return to previous activity levels no sooner than by 2022.

Leading economic indicators will continue to recover over the months to come, but improvements will become more gradual from here. Fiscal stimuli, given their magnitude, have played an important role in the equity markets rebound this year.

The important focus from here will be in the speed of channelling these sizeable fiscal stimuli into the real economies, which we will need to continue to assess, as they might have the potential to accelerate the recovery, but equally could disappoint in terms of execution pace.

The sectors where we could see opportunities materialise in the post-pandemic environment are in six areas, as follows:

• increased infrastructure spend to boost the economy, notably railway and 5G infrastructure;
• increased spend in healthcare infrastructure to both make the public healthcare sector more prepared for future pandemics, and to increase investments in homecare and telemedicine;
• increased incentives in sustainability, whether it is social sustainability or greener solutions in transport, infrastructure and construction in particular.
• increased investment in robotics and automation as corporates tackle the need to make their supply chains more robust;
• increased investment in cybersecurity given the acceleration in the pace of migration to digital economies;
• improvements in food hygiene and general hygiene.

Ultimately, we remain focused on the long term when managing our clients’ assets, and use our thematics analytical framework, based on the three mega-trends that we believe will drive future growth prospects, which are demographic change, future of technology, and resource scarcity. There are many interesting themes within each of these mega-trends, or indeed in areas of overlap between the three mega-trends, which we find particularly interesting, and which provide us with long term structural growth opportunities.’