Investment Perspectives 2021

Executive Summary

2020 was one of the most dramatic years for financial markets

The past year has been a rollercoaster ride for investors as the fastest equity market correction in history was followed by a swift and relentless rally. Equity markets have proven to be very resilient and very forwardlooking as they quickly priced in a strong rebound of earnings for 2021. This has been reflected by a significant re-rating of valuations which leave little room for any disappointments related to the publication of profits in the year ahead.

The Federal Reserve intervened decisively to address the severe dislocations observed in the bond markets, a key element to re-establish confidence. In addition to purchasing Treasuries and investment-grade corporate bonds, the Fed also committed to buy high-yield bonds for the first time ever. Once markets had stabilised, another strong trend was for the US dollar to depreciate against most currencies. The market broadly expects this behaviour to be extended into 2021.

Policy makers did their job in 2020

Central bankers and governments reacted promptly and decisively to support the economy and to limit the damage caused by the pandemic on businesses and households. Record-breaking aid packages and unprecedented support for financial markets were announced. The Federal Reserve slashed its benchmark interest rate to zero and committed to an unlimited expansion of its bond purchasing programs. The ECB also ramped up its asset purchase program and has recently announced an additional increase of €500 billion to a total of €1.85 trillion until March 2022.

The overall size of fiscal action globally has also been unprecedented, at about $12 trillion, close to 12% of global GDP, according to the International Monetary Fund. With economic activity being restricted by governments, their main objective was to prevent massive unemployment and to help businesses to survive the pandemic-induced shutdowns.

A successful rollout of COVID-19 vaccines is key for a strong economic rebound in 2021

The outlook for 2021 is for a strong rebound of GDP growth, + 5.2% according to the IMF, following a year when global GDP is estimated to have dropped by around 5%, the worst peacetime recession. Unprecedented fiscal actions and the rollout of vaccines are expected to significantly boost economic activity, even if some sectors are unlikely to be able to return to pre-COVID-19 levels of activity. Governments will also need to provide the framework for a successful and strong immunization programme by regaining public trust, which has been dented by the management of the crisis.

Current market conditions are supportive for risky assets despite rich valuations

We believe that the positive trends currently prevailing in financial markets should extend into 2021. Despite high valuations, we expect equities to benefit from a strong rebound of earnings in the coming quarters and the portfolios are positioned accordingly. High yield credit and emerging market debt are our favourite bond segments whereas our dollar exposure remains underweight. We are wary of a broad market consensus on the various asset classes as history has shown that the markets’ base case scenario is often derailed by unforeseen events.


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