UBS Year Ahead 2021

Find out our outlook on markets for 2021 and the decade ahead.

A Year of Renewal

Explore our outlook for 2021

 

Welcome to the Year Ahead 2021

In a “Year of Renewal” we will see a world that is steadily returning to normal, despite continued uncertainty, while also rapidly accelerating into a transformed future.

If investing in 2020 was about going resilient, large, and American, we think 2021 will be about going cyclical, small, and global as the sectors and markets most heavily affected by lockdowns start to revive.

At the same time, as the economy accelerates into the future, investors with an eye on the long term will need to add exposure to the disruptors making our world more digital and sustainable, most notably in greentech, fintech, and healthtech, and among the beneficiaries of 5G rollouts.

We hope that this Year Ahead 2021 provides greater perspective on the investment implications of our fast-changing world. We look forward to working together to help shape your portfolio for the future.

Our view and investment actions

The recovery

Our view

We expect the wide-scale rollout of a vaccine in the first half of 2021 to enable global output and corporate earnings to return to pre-pandemic highs by the end of the year.

Investment actions

  • Diversify for the next leg with exposure to global equities, cyclicals with catch-up potential, and long-term winners.
  • Rebalance out of US large-caps and global consumer staples.

Interest rates

Our view

We anticipate few inflationary threats in 2021, and expect interest rates to remain low for the foreseeable future.

Investment actions

  • Hunt for yield in select crossover bonds, emerging market USD-denominated sovereign bonds, and Asia high yield. Alternative means of income include selling volatility and employing leverage.
  • Diversify out of low-yielding cash and bonds.

The US

Our view

We think new political leadership will mean additional fiscal stimulus and more predictable policymaking, shifting market leadership accordingly.

Investment actions

  • US mid-caps and industrials should see higher earnings growth than US large-caps.
  • Position for a weaker dollar by diversifying exposure across G10 currencies.

Long-term investing

Our view

Future returns are likely to be lower than in recent years across all major financial assets. But the outlook for equities and other real assets is more favorable than for government bonds and cash.

Investment actions

  • Invest in “The Next Big Thing,” reallocating existing technology exposure into 5G, fintech, healthtech, and greentech.
  • Diversify into private equity by switching up to 20% of the public equity exposure in your portfolio to private equity.

Chapter 1

A Year of Renewal

We think 2021 will bring renewed growth, a renewed hunt for yield, new leadership, and a new, and renewable, future.

Chapter 2

Key questions

Investors everywhere are asking: How quickly will the world recover? Where is economic policy headed? What's next for the US?

Chapter 3

Investment views

In the year ahead, we recommend investors diversify for the next leg, hunt for yield, and position for a weaker dollar.

Chapter 4

The Decade of Transformation

We think the post-crisis world will be more indebted, more unequal, and more local—but  also more digital, and more sustainable.

Chapter 5

Investment ideas

In the decade ahead, we recommend investors position for "The Next Big Thing", buy into sustainability, and diversify into private markets.

Chapter 6

2020 in review

2020 saw choices in one sphere of policymaking have unprecedented consequences in others. We review what happened as a result.

A Year of Renewal

 

2020 featured unprecedented shutdowns of economic activity, a fusion of monetary and fiscal policymaking, and a vote for new leadership in the US. 2021 will see us start to shift back to pre-pandemic norms while simultaneously accelerating forward into the post-pandemic future.

We think the approval and rollout of a coronavirus vaccine by the second quarter, fiscal policymaking, and US voters choosing legislative gridlock will enable corporate earnings in most regions to recover to pre-pandemic levels by the end of the year. We expect the more economically sensitive markets and sectors, many of which underperformed in 2020, to outperform in 2021. Our preferred areas include small- and mid-caps, select financial and energy names, and the industrial and consumer discretionary sectors.

Low interest rates and high government spending will persist, in our view, as policymakers attempt to mitigate the economic effects of pandemic control measures. In the near term, with the threat of inflation low, we think investors can still find positive real returns in emerging market (EM) USD-denominated sovereign bonds, Asia high yield, and select "crossover bonds" with BBB and BB credit ratings. In the longer term, the combined threat of government spending going too far, or not far enough, means investors may need to prepare for heightened inflationary and disinflationary risks across regions.

2021 will bring a different mix of US political leadership, and we think new market leadership will follow. We expect fiscal stimulus and more predictable foreign relations to support cyclicals, including industrials and mid-caps. Meanwhile, we also expect higher deficits to weaken the US dollar.

The coronavirus pandemic has accelerated, rather than halted, most of the long-term trends already underway. We expect a world that is more indebted, more unequal, and more local to result in below-average long-term returns across traditional asset classes. But we believe investors do have the opportunity to earn higher returns by positioning for a more digital future across 5G, fintech, and healthtech, and for a more sustainable one in greentech.

Scenario analysis

Investment ideas

Downside

A diversified hedging strategy, including gold, dynamic allocation strategies, long duration, and option structures

Pandemic recovery

Upside

A highly effective vaccine becomes widely available by 1Q21 in leading economies.

Social activity fully normalizes by 2Q21.

Developed countries' GDP returns to pre-pandemic levels by end-2021.

Central

An effective vaccine becomes widely available by 2Q21 in leading economies.

COVID-19 waves recur in the first half, but short-term restrictions and limited public fear allow social activity to normalize alongside a vaccine rollout by 3Q21.

Developed countries' GDP returns to pre-pandemic levels by 2022.

Downside

Vaccine availability delayed, or with a lower efficacy than initially thought.

Public fear of COVID-19 is elevated, and restrictions on business activity recur throughout 2021, causing social activity return to normal only by late-2021.

Developed countries' GDP returns to pre-pandemic levels by 2023.

Economic policy

Upside

Central bank policy stays accommodative, albeit edging toward a tightening bias later in the year.

Low real rates and a weaker dollar boost global growth.

Central

Central banks maintain accommodative policy.

Real interest rates remain low and stable.

Downside

Monetary policy support is increased to offset the effects of weak growth, but may be tapered if inflation rises unexpectedly.

Real rates rise initially, but subsequently trend down.

Geopolitics

Upside

The US government is able to agree on a larger-than-expected fiscal deal, closer to USD 2tr.

The Biden administration begins a partial rollback of existing tariffs on China exports, supporting global growth.

Central

The US government agrees on a fiscal deal worth USD 500–1,000bn, and does not increase tax rates.

US-China relations remain a long-term issue, but President-elect Joe Biden’s foreign policy is more predictable than that of his predecessor.

Downside

Ongoing legal challenges to the US election result or partisan political disagreements create uncertainty about fiscal policy.

US-China trade tensions re-escalate, with the fundamental geostrategic rivalry between the US and China not tempered by the new US administration.

Forecasts

Asset class targets for June 2021

Asset class targets for June 2021

Upside

Upside

Central

Central

Downside

Downside

Asset class targets for June 2021

S&P 500 target (current: 3,532)

Upside

4,000

Central

3,800

Downside

2,900

Asset class targets for June 2021

Eurostoxx (current: 3,443)

Upside

3,900

Central

3,600

Downside

2,800

Asset class targets for June 2021

MSCI EM (current: 1,192)

Upside

1,390

Central

1,280

Downside

900

Asset class targets for June 2021

SMI (current: 10,361)

Upside

11,500

Central

11,000

Downside

8,800

Asset class targets for June 2021

USD IG spread (current: 82bps)

Upside

60bps

Central

80bps

Downside

200bps

Asset class targets for June 2021

USD HY spread (current: 422bps)

Upside

350bps

Central

400bps

Downside

700bps

Asset class targets for June 2021

EMBIG spread (current: 375bps)

Upside

280bps

Central

340bps

Downside

550bps

Asset class targets for June 2021

EURUSD (current: 1.18)

Upside

1.25

Central

1.22

Downside

1.12

Asset class targets for June 2021

Gold (current: USD 1,875/oz)

Upside

USD 1,600–1,700/oz

Central

USD 1,950/oz

Downside

USD 2,200–2,300/oz

 

Question 1

How quickly will the world recover?

We expect global economic output and corporate earnings to reach pre-pandemic levels by the end of 2021, enabling economically sensitive markets and sectors to outperform. But accelerated change means it is also important to retain exposure to structural growth.

2020 is set to be among the worst years for the global economy in more than 70 years. We think China will be the only large economy to record any growth, and estimate the US economy will have shrunk by roughly 4%, with developed markets as a whole and emerging markets ex-China contracting by 5%–6%.

48% of investors are very or somewhat optimistic about the outlook for the global economy over the next 12 months, but that figure rises to 66% on a five year view.

Source: 3Q20 UBS Investor Sentiment survey

But we expect 2021 to be a Year of Renewal. Economic activity in China has already largely normalized. And following encouraging early vaccine efficacy data, we remain confident that vaccines will be widely available by the second quarter of 2021. This should help put Europe and the US on the path to a sustained recovery.

If we are right, we expect corporate earnings to rebound quickly. We think developed market earnings will roughly match 2019 levels in 2021. Meanwhile, we anticipate emerging market companies will earn around 15% more in 2021 than in 2019, powered by robust earnings growth in Asia.

Overall earnings should return to pre-crisis levels in 2021

CIO estimate for earnings per share, rebased to 2019 = 100.

Earnings rebased

Earnings rebased

2019

2019

2020

2020

2021

2021

2022

2022

Share price performance year-to-date

Share price performance year-to-date

Earnings rebased

US

2019

100

2020

84.5

2021

103.3

2022

120.5

Share price performance year-to-date

9.7%

Earnings rebased

Asia ex-Japan

2019

100

2020

98.7

2021

118.3

2022

137.3

Share price performance year-to-date

9.9%

Earnings rebased

Euro area

2019

100

2020

58.4

2021

85.7

2022

102.1

Share price performance year-to-date

-6.8%

Earnings rebased

UK

2019

100

2020

55.0

2021

75.9

2022

89.9

Share price performance year-to-date

-16.5%

Earnings rebased

Switzerland

2019

100

2020

91.0

2021

101.9

2022

112.5

Share price performance year-to-date

-2.4%

Earnings rebased

EM

2019

100

2020

93.4

2021

114.5

2022

132.7

Share price performance year-to-date

5.9%

Earnings rebased

Developed markets

2019

100

2020

83.2

2021

103.8

2022

119.8

Share price performance year-to-date

6.3%

Earnings rebased

Global

2019

100

2020

84.4

2021

105.2

2022

121.9

Share price performance year-to-date

6.3%

Revived economic and corporate earnings growth should also mean renewed outperformance from those cyclical companies and markets that underperformed in 2020. We see particular catch-up opportunity in small- and mid-caps, select cyclicals, particularly in the industrial and consumer discretionary sectors, and in markets outside the US.

How will the world be different after the recovery?

The pandemic has made our world both more digital and more local, and not all companies and individuals will be able to adapt. So while we think that in the short term investors can profit by investing in companies exposed to a cyclical recovery, this needs to be combined with exposure to the disruptors set to drive technological transformation over the decade ahead, including 5G, fintech, healthtech, and greentech.

Related investment ideas

Question 2

Where is economic policy headed?

In 2021, we expect interest rates to remain low and fiscal spending to stay high. We believe this combination will prove supportive of equities and credit, and contribute to a weaker US dollar.

2020 brought an unprecedented fusion of fiscal and monetary policy: To fund social support packages, governments ran an aggregate deficit of over 11% of global GDP in 2020, while the world’s top five central banks printed an aggregate of USD 5tr.

In 2021, we think governments in general will continue to “bridge the gap” until a vaccine enables a return to normal economic functioning. We also expect central banks to keep interest rates low to support growth and inflation.

Central banks printed USD 5tr in 2020

Aggregate central bank balance sheets: Fed, BoJ, BoE, ECB, SNB

Source: Fed, BoJ, BoE, ECB, SNB, UBS, as of 20 October 2020

But the longer-term path is less predictable.

One possibility is that governments recoil at the risk of higher debt and inflation, and pull back fiscal spending programs too far or too fast. Monetary policy alone is unlikely to be sufficient to support the economic recovery, so this outcome would likely mean an extended period of disinflation and low growth.

Just 38% of surveyed investors are worried about the impact of inflation on meeting their financial goals or objectives.

Source: 3Q20 UBS Investor Sentiment survey

A more likely possibility is that governments are reluctant to enact austerity policies, having so far run much higher deficits without suffering higher inflation or borrowing costs. In this scenario, governments continue to run large deficits and loose monetary policy persists even if inflation moves moderately higher.

Although neither scenario is likely to materialize in 2021, they could begin to shape a longer-term investor narrative, and therefore start to impact asset prices. To prepare for a scenario of higher inflation and negative real interest rates, we recommend investors seek out long-term secular growth, both in public and in private markets. To prepare for disinflation and low or negative rates, investors should lock in available yield.

Government debt-to-GDP rose by 20ppts in 2020

Median government debt-to-GDP for advanced economies, in %

Source: IMF, UBS, as of 21 October 2020

How should I plan for inflation?

When it comes to building a financial plan, we have to account for the fact that goods and services tend to rise in cost each year. Inflation can have a meaningful impact on how much investors must save in order to successfully fund their future goals. Even with just 2% inflation, prices would be 80% higher over a 30-year time span.

Preparing for inflation requires that investors ensure their portfolios have sufficient exposure to growth and “real” assets, like stocks and real estate, and it demands a careful awareness of withdrawal rates. The table below shows that higher inflation expectations generally mean investors either have to reduce spending, or try to increase portfolio returns.

For example, an investor with USD 1mn who wants a less than 20% chance of having less than USD 500,000 left in 30 years, and expects their assets to return 6.4% per year with 8.8% volatility, could withdraw approximately USD 45,000 in the first year, and then 2% more in each subsequent year.

"Safe" initial spending rate, assuming USD 1,000,000 of invested capital*

Annual nominal spending growth

Annual nominal spending growth

All Fixed Income

Exp. return: 4.3%

Volatility: 4.2%

All Fixed Income

Exp. return: 4.3%

Volatility: 4.2%

Balanced Portfolio

Exp. return: 6.4%

Volatility: 8.8%

Balanced Portfolio

Exp. return: 6.4%

Volatility: 8.8%

All Equity

Exp. return: 8.3%

Volatility: 15.0%

All Equity

Exp. return: 8.3%

Volatility: 15.0%

Annual nominal spending growth

1% 

All Fixed Income

Exp. return: 4.3%

Volatility: 4.2%

USD 41,000

Balanced Portfolio

Exp. return: 6.4%

Volatility: 8.8%

USD 50,000

All Equity

Exp. return: 8.3%

Volatility: 15.0%

USD 54,000

Annual nominal spending growth

2%

All Fixed Income

Exp. return: 4.3%

Volatility: 4.2%

USD 36,000

Balanced Portfolio

Exp. return: 6.4%

Volatility: 8.8%

USD 45,000

All Equity

Exp. return: 8.3%

Volatility: 15.0%

USD 48,000

Annual nominal spending growth

3%

All Fixed Income

Exp. return: 4.3%

Volatility: 4.2%

USD 32,000

Balanced Portfolio

Exp. return: 6.4%

Volatility: 8.8%

USD 40,000

All Equity

Exp. return: 8.3%

Volatility: 15.0%

USD 43,000

Related investment ideas

  • Hunt for yield in EM USD-denominated sovereign bonds, Asian high yield, and crossover bonds.

Question 3

What’s next for the US?

We expect fiscal stimulus and the rollout of a vaccine to drive the economic recovery and outperformance for mid-caps, and select cyclical sectors, relative to large-caps. The US dollar will depreciate, in our view.

At the time of writing, it looks likely that we will see a divided government, with a Democratic President and House along with a Republican-led Senate. This is likely to mean a smaller-than-anticipated, but still sizable, fiscal stimulus package. Political gridlock could also have some positive effects. Republican control of the Senate would make significant tax increases on businesses or individuals unlikely in the coming years. It would also reduce the probability of aggressive new regulation on healthcare or fossil fuel companies. More broadly, divided government lowers the potential for significant policy changes, reducing the potential for policy-induced market volatility.

We identify three key effects:

Over 50% of investors are planning to make changes to their portfolio in light of the US election result.

Source: UBS Investor Watch Pulse, as of 29 October 2020

1. Stimulus to boost mid-caps

We think the new administration will be able to enact another coronavirus aid package worth between USD 500bn and 1tr, or roughly 2.5%–5% of GDP, which should bode well for consumer spending and business confidence, and help drive a shift in market leadership away from large-caps and toward mid-caps. Mid-cap earnings are more leveraged to an economic recovery, and we expect them to grow at around twice the pace of large-cap earnings in 2021.

2. A higher deficit to weaken the US dollar

We expect higher fiscal spending to be funded by a rising deficit, rather than additional taxes. Although spending can largely be funded by private domestic savings in the near term, as the economy begins to recover in 2021, we expect the private sector to increase spending, widening the current account deficit and requiring a weaker dollar to attract external funding.

3. A more predictable China rivalry to emerge

We think the Biden administration will renew the US’s approach to foreign relations, a tack that should improve relations with Europe in particular. Although the fundamental US-China geostrategic rivalry won’t change, we do think the new administration will be less likely to use tariffs as a tool of foreign policy. Reduced trade tensions should support the economic recovery, reinforcing our preference for cyclicals such as industrials.

Cyclicals should see higher earnings growth than defensives and technology

Consensus earnings per share growth in 2021, in % 

Source: FactSet, UBS, as of 12 October 2020

What’s next for US tech?

After rally of over 50% in 2020, the top five US technology firms alone now represent around one-eighth of the MSCI AC World equity index, more than China, the UK, and Switzerland combined. We expect the technology sector to continue to benefit from strong secular growth in digital advertising, e-commerce, cloud computing, and the 5G rollout.

However, valuations have increased, and we think other segments of the market will see stronger earnings growth in 2021 as they recover from depressed levels. Anti-trust scrutiny also bears monitoring, although a divided government would reduce the probability of new regulations, and in any case we would expect judicial proceedings to take years to reach resolution.

How should I think about my country allocation?

The US equity market now represents 58% of the MSCI AC World equity index, up from 51% five years ago. Even though the US market has outperformed global stocks in 10 of the past 11 years, outperformance doesn't last forever.

For US-based investors, home bias is another important factor. If the US stock market does poorly, this may be coincident with other financial challenges, such as higher unemployment, lower wage gains, or less home price appreciation. The equity allocation should take into account these other assets and future liabilities. Investing globally can help to diversify portfolios and protect investors against the inherent risks of such correlations.

We expect the US to start to underperform ex-US stocks at some stage in 2021, over the long run. In general, we don't recommend that investors allocate more than 58% of their equity allocation to US stocks in their public market portfolios, and would also encourage investors to allocate more to other regions in their private equity allocations.

Related investment ideas

 
 

Year Ahead 2021

Diversify for the next leg

We expect equity markets to move higher in 2021. In a Year of Renewal, we also believe some of 2020’s laggards will catch up. Investors need to think global, look for catch-up potential, and seek long-term winners.

Year Ahead 2021

Hunt for yield

We expect interest rates on cash and bond yields to stay at very low levels for the foreseeable future. The renewed hunt for yield means investors need to take a look at the role of cash and bonds in portfolios and consider being more active, increasing exposure to emerging markets and Asia, or finding alternative means of earning income.

Year Ahead 2021

Position for a weaker dollar

We expect the US dollar to weaken in 2021 due to a recovering global economy, and a diminished interest rate differential. To position for this, we think investors should diversify across G10 currencies or into select emerging market currencies and gold.

Contact us today

Ready to start a conversation? We look forward to speaking with you soon.

The Decade of Transformation

 

 
 

What you need to know about the Decade Ahead

The global coronavirus pandemic has accelerated many of the trends already in evidence when we entered this Decade of Transformation. We think the post-crisis world will be more indebted, more unequal, and more local—but also more digital, and more sustainable.

We forecast that advanced economies’ debt-to-GDP ratios will be over 20 ppts higher by the end of 2021 than at the end of 2019. And, given aging populations, minimal societal appetite for fiscal austerity, and low debt-servicing costs, we expect government spending to remain elevated by historical standards. Excess savings should enable relatively comfortable debt financing in the near term. But in the medium term, we think that debt financing will require some combination of higher taxation, regulation to encourage greater institutional investment in government bonds, or moderately higher inflation, underscoring the importance of owning “real” assets such as equities.

Post-COVID-19 debt levels are forecast to increase

US Federal debt held by the public, 2000 to 2050, in % of GDP

Source: US Congressional Budget Office (CBO), UBS, as of 30 September 2020

The pandemic has had a negative effect on employment for lower-skilled workers, while the nature of knowledge work, which can largely be performed from home, and the financial markets’ good performance have favored high-income and high-wealth individuals. In the future, technological disruption could widen the wealth gap even further. Whether wealth inequality reaches its political limits in the coming years remains to be seen, though we should expect to see more political leaders running on platforms that include some element of wealth redistribution. The resulting potential regional variations in economic policy make global diversification particularly important.

Higher-paid workers are likelier to be able to work from home

% of US respondents who worked from home or stayed home from work and were unable to work

Source: Sample of 8,572 randomly selected adults from the GALLUP panel, interviewed over the phone from 16 March to 22 March 2020

Political considerations in an increasingly multipolar world, security concerns in light of the pandemic, consumer preferences tilting toward sustainability, and new technologies enabling localized production are all contributing to the world becoming more local. The aggregate effect on growth and inflation is unclear. But these factors can be expected to favor companies exposed to automation and robotics, companies already factoring sustainability into their supply chains, and companies based in ASEAN and India that could benefit from supply chain diversification out of China.

The pandemic has triggered more corporate conversations about localization

Number of mentions of keywords related to supply chain diversification in transcripts

Source: UBS Evidence Lab, as of 12 October 2020

The COVID-19 pandemic has forced much faster digital adoption and disrupted established norms. This could transform various industries, and, combined with the unfolding impact of the fourth industrial revolution, could boost medium-term productivity. The crisis could also have the effect of suppressing real interest rates because the more efficient use of capital stock and a shift from tangibles to intangibles lowers the demand for investment capital. On the flip side, a more digital world will produce its fair share of losers too. We see particular risks for physical retail and traditional energy over the course of the next decade.

68% of business owners say they expect digitalization to have a positive effect on their business. 61% say they expect sustainability to have a positive effect.

Source: 3Q20 UBS Investor Sentiment survey

Demand for carbon is still rising, but in 2020 the EU and Japan pledged to go carbon neutral by 2050, and China promised to do the same by 2060. Stricter environmental regulations could mean higher costs for some businesses. But companies that are well positioned for the transition, such as those providing greentech solutions, stand to benefit from a more sustainable world.

The EU’s goal is climate neutrality by 2050 

Source: BP Statistical Review of World Energy, UBS, as of October 2020

Investing in the Decade Ahead

In the next decade, investors will likely need to take on more risk to achieve the same returns as in the past decade. Cash and the safest bonds are likely to deliver negative real returns for the foreseeable future, while credit and equity still offer attractive risk premiums, in our view. We also see private market and sustainable assets as valuable in a portfolio context.

Asset class forecast

High government debt levels, societal calls for higher government spending, and reduced demand for capital in a digital world mean real interest rates are likely to remain at very low levels for the foreseeable future, in our view. Moreover, the move to average inflation targeting frameworks indicates that central banks will tolerate moderately higher levels of inflation. As a result, we think cash and high quality bonds will deliver a negative real return over the long term. We expect returns over the coming business cycle to average less than 1% for US Treasuries, which would likely lead to negative returns after inflation. Such low potential returns, as well as the reduced ability of high quality bonds to provide meaningful positive returns during equity drawdowns, suggest that investors should instead look to credit and alternative assets.

Total returns in credit are likely to be lower than in the previous decade. But, given that many central banks have added credit to their purchase lists, and in light of the very low yields in government bonds, we think credit should continue to play an important role in portfolios. We anticipate default rates and spreads both will decline below past averages as a result of low yields globally. We expect annual returns of less than 4% for USD high yield credit and about 5% for emerging market sovereign bonds in USD. We expect US investment grade credit to return around 1.5%.

The anticipated bounceback from the coronavirus crisis notwithstanding, we expect muted long-term economic growth in developed markets due to aging populations and high debt levels. Corporate net margins also face pressure from potentially higher taxation and minimum wages, political and security considerations, and tighter environmental regulations. That said, we think multiples should be well supported due to low interest rates, and we note risk premiums are higher than historical norms. The increased use of technology and changes to established working practices driven by the pandemic could also lead to higher worker productivity.

Overall, we expect nominal returns to average a little under 6% in the US annually over the coming business cycle, though we foresee higher returns for smaller size segments than we do for US large-caps. In developed markets outside the US, we expect returns to be closer to 8% after underperforming US stocks over the past few years. Regionally, we think the long-term outlook is most promising for emerging market stocks, which we expect to average a over 9% annual return (versus 4% over the past 15 years) thanks to lower initial valuations, a more favorable overall demographic profile, and greater potential for productivity gains. Investors seeking higher returns can also consider specific themes and sectors that we think have higher growth potential.

Amid lower returns in developed market equities, and given the increased opportunity cost of using bonds to stabilize portfolios, investors will need to search for alternative sources of returns and diversification such as private markets and hedge funds. Private markets require long capital commitments, but we expect returns of returns near 9% per year in private equity, around 3ppts higher than public equity, and 8% per year in private debt. For more on this topic, please see page 53. Meanwhile, we expect funds of hedge funds overall to return approximately 3% (in USD) per year, over the long term. We see particular hedge fund opportunities in the thematic and equity selection space due to the structural changes set in motion by the pandemic.

Prices are currently cyclically depressed, and energy prices in particular have ample room to recover in the wake of the pandemic. Overall, we think broad commodities indexes will return roughly 4% annualized over the coming business cycle, driven by strong expected returns in energy. We expect gold to return 4% a year.

We expect the US dollar to weaken in the years ahead, so it is important to review dollar exposure and implement hedges if necessary. On the other hand, we think broad emerging market currencies, as well as the Japanese yen and the British pound, offer the most upside potential over the long term. International investors who hold assets in these markets should keep the currency exposure to benefit from this expected appreciation, in our view.

In a low interest rate environment, real estate remains an attractive investment for income generation in our view, particularly when compared with cash or government bonds. Real estate’s inflation protection characteristics may prove beneficial in a more indebted world. While we do not think that either city living or the office market has been permanently impaired. due to the pandemic, active private real estate strategies should provide better returns compared with low yield buy-and-hold strategies. We still expect nominal returns to average about 6% annually in private real estate (in USD), compared to the average of 8.5% over the past two decades.

 
 

Decade Ahead

Invest in “The Next Big Thing”

We think the next decade will reward investing in the companies using technology to disrupt other sectors. We expect “The Next Big Thing” to materialize within the fintech, healthtech, or greentech spaces, or to be enabled and accelerated by the global rollout of 5G technology.

Decade Ahead

Buy into sustainability

Sustainable investing considers all relevant social and environmental factors in order to better mitigate risks and identify opportunities. Increased government, business, and consumer emphasis on sustainability, combined with a growing investable opportunity set, means sustainable investing is now our preferred approach for investing globally.

Decade Ahead

Diversify into private markets

With returns on traditional investments likely to be lower in the future, allocations to private equity and private debt may help enhance returns and diversify portfolios. Private markets have historically provided above-average returns following dislocations, and they can offer investors unique access to growth industries.

Contact us today

Ready to start a conversation? We look forward to speaking with you soon.

 

In 2020, choices in one sphere of policymaking had unprecedented consequences in others. Health and economic policies melded, fiscal and monetary authorities moved as one, and humans and machines were forced closer together, even as social distancing pushed people farther apart.

Here is what happened as a result:

For the first time since 2009, the global economy looks set to contract, with GDP estimated to shrink by 3.8%. Policymakers mandated unprecedented mobility restrictions in an attempt to slow the spread of COVID-19, but also approved over USD 12tr in fiscal stimulus measures to help cushion the blow to individuals and businesses.

Monetary policy played a supporting role too, with over 30 major central banks cutting rates and some reintroducing quantitative easing measures.

Accommodative monetary policy contributed to record-low yields. The 10-year US Treasury yield hit an all-time low in March, and over USD 17tr of bonds now have negative yields. After widening to 1,087bps and 373bps on liquidity and default concerns, US high yield and US investment grade credit spreads tightened to below 500bps and 130bps, respectively, on the back of a rapid recovery.

We witnessed historically volatile markets and the fastest bear market on record. The combination of monetary and fiscal stimulus helped mitigate the initial shock of the pandemic, and led to a record-breaking market rebound. At the time of writing, year-to-date global stocks have returned 6.3%, the S&P 500 9.7%, the Euro Stoxx 50 fell 6.8%, and the SMI is down 2.4%. Growth stocks have outperformed value stocks by 29ppts, large-caps have outperformed mid-caps by 5ppts, and US defensives have outperformed cyclicals by almost 30ppts.

Safe-haven flows supported the US dollar in mid-March, helping it reach multi-year highs versus the euro. But while central banks around the world eased policy in the wake of the crisis, the Fed’s easing program was more comprehensive than many other nations’. The US dollar index now trades 10% lower than the March peak.

WTI oil contracts briefly traded in negative territory in April, reaching as low as USD –40/bbl when investors wanted to avoid taking physical delivery, before rebounding later in the year. Meanwhile, gold was one of the best-performing assets of the year, briefly climbing above USD 2,000/oz at its peak as real rates fell and the US dollar declined.

Survey data indicates that hedge funds lived up to investor expectations in 2020 triggering renewed interest in the asset class. Managers successfully mitigated downside risk in March/April and subsequently took advantage of temporary dislocations to generate returns. Performance across strategies, however, varies. Top performing strategies included tech, healthcare, equity long/short, discretionary macro, and multistrategy funds. Meanwhile CTAs, structured credit, and other event-driven funds lagged other strategies.

Throughout the year we held a pro-risk stance, looking for opportunities across credit and equities as they arose, given our view that fiscal and monetary policy would prove sufficient to prevent the health and economic crisis tipping into a financial one. We also sought exposure to secular themes, including technology, sustainability, and healthcare, which we view as long-term beneficiaries as we transition to a more indebted, more local, and more digital world.

Asset class and economic forecasts

Commodities

Commodities

Commodities

Spot

Spot

Jun-21

Jun-21

Dec-21

Dec-21

Commodities

Brent crude oil (USD/bbl)

Spot

44.4

Jun-21

52.0

Dec-21

60.0

Commodities

WTI crude oil (USD/bbl)

Spot

42.2

Jun-21

50.0

Dec-21

57.0

Commodities

Gold (USD/oz)

Spot

1,875

Jun-21

1,950

Dec-21

1,850

Commodities

Silver (USD/oz)

Spot

24.2

Jun-21

25.0

Dec-21

23.0

Commodities

Copper (USD/mt)

Spot

6,932

Jun-21

7,000

Dec-21

6,700

Currencies

Developed markets

Developed markets

Spot

Spot

Jun-21

Jun-21

Dec-21

Dec-21

PPP

PPP

Developed markets

EURUSD

Spot

1.18

Jun-21

1.21

Dec-21

1.23

PPP

1.29

Developed markets

USDJPY

Spot

106

Jun-21

105

Dec-21

107

PPP

76

Developed markets

GBPUSD

Spot

1.32

Jun-21

1.34

Dec-21

1.37

PPP

1.54

Developed markets

USDCHF

Spot

0.92

Jun-21

0.89

Dec-21

0.89

PPP

0.93

Developed markets

EURCHF

Spot

1.08

Jun-21

1.09

Dec-21

1.10

PPP

1.19

Developed markets

EURGBP

Spot

0.89

Jun-21

0.90

Dec-21

0.90

PPP

0.83

Developed markets

AUDUSD

Spot

0.73

Jun-21

0.75

Dec-21

0.77

PPP

0.66

Developed markets

USDCAD

Spot

1.31

Jun-21

1.26

Dec-21

1.24

PPP

1.21

Developed markets

EURSEK

Spot

10.18

Jun-21

10.20

Dec-21

10.10

PPP

9.66

Developed markets

EURNOK

Spot

10.68

Jun-21

10.40

Dec-21

10.30

PPP

10.83

Emerging markets

Emerging markets

Spot

Spot

Jun-21

Jun-21

Dec-21

Dec-21

Emerging markets

USDCNY

Spot

6.6

Jun-21

6.3

Dec-21

6.3

Emerging markets

USDIDR

Spot

14,085

Jun-21

13,800

Dec-21

13,800

Emerging markets

USDINR

Spot

74.4

Jun-21

71.0

Dec-21

70.0

Emerging markets

USDKRW

Spot

1,110

Jun-21

1,100

Dec-21

1,060

Emerging markets

USDRUB

Spot

76

Jun-21

65

Dec-21

65

Emerging markets

USDTRY

Spot

7.8

Jun-21

7.3

Dec-21

7.9

Emerging markets

USDBRL

Spot

5.4

Jun-21

5.0

Dec-21

5.0

Emerging markets

USDMXN

Spot

20.6

Jun-21

21.0

Dec-21

21.5

Rates and bonds

Base rates

Base rates

Current

Current

Jun-21

Jun-21

Dec-21

Dec-21

Base rates

USD

Current

0.13

Jun-21

0.09

Dec-21

0.09

Base rates

EUR

Current

-0.50

Jun-21

-0.50

Dec-21

-0.50

Base rates

CHF

Current

-0.75

Jun-21

-0.75

Dec-21

-0.75

Base rates

GBP

Current

0.10

Jun-21

0.10

Dec-21

0.10

Base rates

JPY

Current

-0.03

Jun-21

-0.10

Dec-21

-0.10

10-year yields (%)

10-year yields (%)

Spot

Spot

Jun-21

Jun-21

Dec 21

Dec 21

10-year yields (%)

USD

Spot

0.96

Jun-21

0.85

Dec 21

0.90

10-year yields (%)

EUR

Spot

-0.49

Jun-21

-0.40

Dec 21

-0.40

10-year yields (%)

CHF

Spot

-0.43

Jun-21

-0.50

Dec 21

-0.50

10-year yields (%)

GBP

Spot

0.40

Jun-21

0.30

Dec 21

0.40

10-year yields (%)

JPY

Spot

0.05

Jun-21

0.00

Dec 21

0.00

Economic forecasts

Americas

Americas

2019 GDP growth

2019 GDP growth

2020E GDP growth

2020E GDP growth

2021E GDP growth

2021E GDP growth

2019 inflation growth

2019 inflation growth

2020E inflation growth

2020E inflation growth

2021E inflation growth

2021E inflation growth

Americas

US

2019 GDP growth

2.2

2020E GDP growth

-3.6

2021E GDP growth

3.6

2019 inflation growth

1.8

2020E inflation growth

1.2

2021E inflation growth

1.1

Americas

Brazil

2019 GDP growth

1.1

2020E GDP growth

-4.5

2021E GDP growth

3.0

2019 inflation growth

3.7

2020E inflation growth

3.1

2021E inflation growth

4.3

Americas

Canada

2019 GDP growth

1.6

2020E GDP growth

-5.4

2021E GDP growth

4.3

2019 inflation growth

1.9

2020E inflation growth

0.6

2021E inflation growth

1.3

Europe

Europe

2019 GDP growth

2019 GDP growth

2020E GDP growth

2020E GDP growth

2021E GDP growth

2021E GDP growth

2019 inflation growth

2019 inflation growth

2020E inflation growth

2020E inflation growth

2021E inflation growth

2021E inflation growth

Europe

Eurozone

2019 GDP growth

1.3

2020E GDP growth

-7.4

2021E GDP growth

5.2

2019 inflation growth

1.2

2020E inflation growth

0.2

2021E inflation growth

1.0

Europe

– Germany

2019 GDP growth

0.6

2020E GDP growth

-5.8

2021E GDP growth

4.1

2019 inflation growth

1.4

2020E inflation growth

0.4

2021E inflation growth

1.0

Europe

– France

2019 GDP growth

1.5

2020E GDP growth

-9.6

2021E GDP growth

6.8

2019 inflation growth

1.3

2020E inflation growth

0.5

2021E inflation growth

0.8

Europe

– Italy

2019 GDP growth

0.3

2020E GDP growth

-8.8

2021E GDP growth

5.8

2019 inflation growth

0.6

2020E inflation growth

-0.2

2021E inflation growth

0.3

Europe

– Spain

2019 GDP growth

2.0

2020E GDP growth

-11.4

2021E GDP growth

6.0

2019 inflation growth

0.8

2020E inflation growth

-0.4

2021E inflation growth

0.6

Europe

UK

2019 GDP growth

1.3

2020E GDP growth

-11.3

2021E GDP growth

5.0

2019 inflation growth

1.8

2020E inflation growth

0.8

2021E inflation growth

1.5

Europe

Russia

2019 GDP growth

1.3

2020E GDP growth

-3.5

2021E GDP growth

2.7

2019 inflation growth

4.5

2020E inflation growth

3.3

2021E inflation growth

3.9

Europe

Switzerland

2019 GDP growth

1.1

2020E GDP growth

-4.5

2021E GDP growth

3.2

2019 inflation growth

0.4

2020E inflation growth

-0.7

2021E inflation growth

0.2

Asia

Asia

2019 GDP growth

2019 GDP growth

2020E GDP growth

2020E GDP growth

2021E GDP growth

2021E GDP growth

2019 inflation growth

2019 inflation growth

2020E inflation growth

2020E inflation growth

2021E inflation growth

2021E inflation growth

Asia

China

2019 GDP growth

6.1

2020E GDP growth

2.1

2021E GDP growth

7.5

2019 inflation growth

2.9

2020E inflation growth

2.6

2021E inflation growth

1.8

Asia

Japan

2019 GDP growth

0.7

2020E GDP growth

-5.2

2021E GDP growth

3.2

2019 inflation growth

0.5

2020E inflation growth

0.0

2021E inflation growth

-0.1

Asia

India

2019 GDP growth

4.2

2020E GDP growth

-10.5

2021E GDP growth

10.0

2019 inflation growth

4.8

2020E inflation growth

5.9

2021E inflation growth

4.0

Asia

South Korea

2019 GDP growth

2.0

2020E GDP growth

-2.0

2021E GDP growth

4.8

2019 inflation growth

0.4

2020E inflation growth

0.7

2021E inflation growth

1.4

Totals

Totals

2019 GDP growth

2019 GDP growth

2020E GDP growth

2020E GDP growth

2021E GDP growth

2021E GDP growth

2019 inflation growth

2019 inflation growth

2020E inflation growth

2020E inflation growth

2021E inflation growth

2021E inflation growth

Totals

Developed markets

2019 GDP growth

1.6

2020E GDP growth

-5.4

2021E GDP growth

4.2

2019 inflation growth

1.4

2020E inflation growth

0.7

2021E inflation growth

1.0

Totals

Emerging markets

2019 GDP growth

4.0

2020E GDP growth

-2.8

2021E GDP growth

6.7

2019 inflation growth

4.4

2020E inflation growth

4.0

2021E inflation growth

3.6

Totals

World

2019 GDP growth

3.0

2020E GDP growth

-3.8

2021E GDP growth

5.6

2019 inflation growth

3.1

2020E inflation growth

2.6

2021E inflation growth

2.5

 

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