January 2021 / MULTI-ASSET SOLUTIONS
Uncovering Opportunities Amid Recovery
A winding path back
- The year ahead will likely be defined by how quickly vaccines can combat COVID‑19’s spread and unlock the global economy.
- The global recovery should create a broadening of investment opportunities and rotation toward more cyclically oriented regions and sectors.
- Post‑pandemic winners and losers will emerge as consumers, businesses, and economies adapt to the new environment.
Markets are entering the new year optimistic about the successful development of vaccines to combat the spread of COVID‑19, seeing the news as a light at the end of the dark tunnel that was 2020. The extreme enthusiasm, however, has driven many markets to record highs, extending valuations and creating a rotation toward cheaper stocks in more cyclically exposed parts of the economy. In contrast with last year, 2021 is likely to be a year of reversion rather than momentum, reinforcing the benefits of broader diversification.
Reopening to Unleash Pent‑Up Global Demand
While there is reason to be optimistic about the effectiveness of the vaccines as a catalyst for recovery in 2021, global economies still face unprecedented logistical challenges in deploying the vaccines. At the same time, fears about another wave of the coronavirus are again forcing many countries to enforce lockdowns. The path to successful global immunization by the spring could be winding and uneven as different parts of the world deal with the current crisis while potentially exhausting their stimulus measures, leaving extended markets vulnerable to near‑term volatility. Although the path may be choppy, we expect the recovery to take hold once broad immunization occurs, allowing economies to safely reopen and unleashing pent‑up global demand.
The improving economic backdrop, supported by monetary policies set to remain ultra‑accommodative, will create opportunities and risks as markets rotate toward the “COVID‑off recovery.” The environment should be supportive for risk assets, including stocks and corporate bonds, as growth and earnings outlooks improve, potentially leading to a broadening of performance across asset classes and sectors. More cyclically exposed economies and sectors may outperform, although investors will be cautious in avoiding segments of the markets that may be impaired by post‑pandemic trends, warranting the need to be selective.
Improving growth trends, however, may put upward pressure on longer‑term interest rates, leaving nominal U.S. Treasuries and other high‑quality global sovereign bonds as unattractive diversifiers. Investors will likely trend toward higher‑yielding sectors, inflation‑linked securities, and other investments with less interest rate sensitivity. Although the new year is beginning with little perceived upside to extended valuations, attractive relative valuation opportunities persist across markets—notably those that have been on the losing side of decades‑long trends.
Pent‑Up Demand Could Boost Recovery
(Fig. 1) Real year-over-year gross domestic product growth*
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