Growth names, alternative income, and Japanese equities – two multi-asset managers look at where to make returns in 2021

Investors have endured one of the most volatile market environments for years in 2020, with the coronavirus pandemic fuelling the kind of bust and boom cycle that we have avoided for some time.

What comes next is still unclear, with the risk of further outbreaks hanging over many countries, and the effectiveness and distribution of vaccines still a big hurdle facing investors.

For companies globally there are concerns about future earnings, and whether their customers come back or not.

Across asset classes there are challenges. Bond yields have never been lower and an increasing chunk of government debt now has a negative yield.

Elsewhere, commodity markets have endured a rollercoaster 12 months, during which the price of oil turned negative, only to storm back to $50 a barrel. Its future is clouded by environmental concerns, and other alternative energies are coming to the fore, even as the materials needed to deliver them to end consumers are being mined out of the ground.

It is an unenviable task to try and position portfolios against this backdrop, but below two experts give their takes on where to look for opportunities in 2021.

“Focus on growth names” in uncertain environment – David Coombs, Rathbone Multi-Asset Portfolio Funds

“In these last months of 2020, we expected an aggressive ‘style rotation’ into value companies and cyclicals once a glimmer of light was spotted at the end of the pandemic’s tunnel. This was why we’ve been buying companies that, while still ‘quality’ businesses, are more sensitive to an economic recovery. These businesses, which we’ve been adding over past months, haven’t rocketed as high as some of the truly bedrock ‘value’ have done. Yet most have gained considerably, ensuring that we’ve benefited from this rotation.

“Investors’ full-throated embrace of ‘value’ may turn out to be a little overexuberant, however, although it may have further to run. Vaccines could soon start falling among us like snow – news was out last week of the UK becoming the first country in the world to approve the Pfizer/BioNTech vaccine for widespread use. There are others in final stages so more results could appear in the coming weeks and months. And more success stories could lend more credibility to the idea that inoculation against this virus will soon be widespread and the world will revert to normal.

“Yet there are many distributional challenges that should be kept in mind. Getting so many hundreds of millions of doses dispatched to all the regions of the world, and then administered, will take time and money. Also, it’s important to remember that growth wasn’t that great before we came to know COVID-19. The world is getting older, more indebted and more digital. Those trends will only accelerate because of the pandemic: people may put off having children, owing to the expense; governments, companies and households are borrowing more to get through the dislocation; and everyone is embracing online and remote options.

“All these trends are the reason why we believe it’s best to be biased toward ‘growth’ companies – those businesses whose profits are growing because of more than simply a recovery in the economy. They tend to be driven by the themes we outlined above – lots of digital enablers, online retailers, and internet media companies. When there’s not much growth around, those businesses that can expand should be in high demand.”

Japanese equities offering exposure to “global economic upswing” – Colin Dryburgh, investment manager, Aegon Asset Management

“Risky assets should be supported by a combination of factors during 2021.  These include an upswing in global economic activity and corporate profits as economies recover from Covid-induced depressed levels, ongoing ultra-loose monetary policy, and reduced US political uncertainty following the US election.

“Sustainable investment strategies should continue to benefit from their exposure to structural growth themes such as decarbonisation, better health care, and solutions that improve resource efficiency.

“The significant reallocation of capital towards these strategies will continue to be driven by multiple factors, including growing investor demand, a growing understanding amongst investment professionals that ESG factors are an important driver of both risk and return, and growing ESG-related regulation (led by Europe) being imposed on the stewards of capital. Joe Biden’s election platform was based on strong environmental and social themes and he may well aim to develop a US regulatory framework that is supportive of more sustainable investing.

“The scarcity of income available from traditional fixed income assets should be supportive of both quality income-oriented equity strategies, and alternative income-generating assets such as infrastructure and renewable energy.  These investments typically provide a relatively stable level of income with an element of inflation protection. Renewable energy related investments also benefit from the secular shift towards decarbonisation.

“The low yield on most government securities reduces their diversification benefits in a multi-asset portfolio. This is because the potential for yield reduction – and therefore capital appreciation – in a ‘risk-off’ environment is less than it has been historically.  US Treasuries yield relatively more than most other developed economy government bonds and we still consider them a useful diversifier in multi-asset context.  Australian government bonds also look relatively attractive at current levels.

“Currency exposure is an often overlooked or completely ignored part of many investors’ portfolios, but this too has the potential to either add or diversify risk in 2021. The Japanese yen is reasonably valued and offers attractive diversification characteristics because Japanese investors own a large amount of foreign assets, and the prospect of them repatriating funds when markets become risk-averse tends to support the yen during such times.

“Investors looking for tactical exposure to the global economic upswing should consider Japanese equities.  The market is not well owned by foreign investors and the Japanese economy is highly sensitive to the global business cycle, due to its manufacturing base. However, Japan’s long-standing issues of debt, demographics and deflation limit the attractiveness of its equity market over the longer term.

“Finally, at an increasing pace capital is flowing around the world in search of attractive returns. In the current dynamic environment correlations are moving around quickly, which makes it is crucial to have an active asset allocation approach to tilt a portfolio towards the desired level of return, while maintaining sufficient diversification benefits to control risks. A robust investment process that combines these characteristics is the final key.”