A close look at this week’s trending topic

Investing in a Year of Renewal

Source: Getty Images.

2020 featured unprecedented shutdowns of economic activity, a fusion of monetary and fiscal policymaking, and a vote for new leadership in the US. We’re calling 2021 a Year of Renewal, which will see us start to shift back to pre-pandemic norms while at the same time accelerating forward into the post-pandemic future.

We expect the rollout of a COVID-19 vaccine to drive the economic recovery, supported by interest rates that are set to stay low, and fiscal spending that is set to stay high. We think global economic output and corporate earnings can reach pre-pandemic levels by the end of 2021.

What should investors do?

First, we think it is time to diversify for the next leg. We expect equity markets to continue moving higher in 2021, but think some of 2020's laggards will "catch up". 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:

Think global: we think US stocks, particularly large caps, will start to underperform other markets at some stage in the coming year. The postpandemic recovery in corporate earnings will be stronger in the more cyclically-exposed Eurozone and UK markets, while valuations are more favorable in emerging markets.

Look for catch up potential. Some of the areas with the most potential to "catch up", in our view, include US mid-caps, European small- and midcaps, select financial and energy stocks, and the industrial and consumer discretionary sectors.

Second, investors should continue to hunt for yield. We expect interest rates on cash and bond yields to stay at very low levels for the foreseeable future. This makes it harder to find income and investors will need to consider being more active or finding alternative means of earning income. We think investors can still find positive real returns in emerging market USD-denominated sovereign bonds, Asian high yield, and bonds in the "crossover zone" between investment grade and high yield, globally.

Alternative means of adding income include put writing, structured solutions, and direct lending. In addition, in our view it now also a good time for investors to consider whether adding leverage to their financial plan could boost their probability of success.

Third, we think it is time to position for a weaker dollar, due to the elevated US twin deficit, a recovering global economy, and the erosion of the US dollar's interest rate advantage over the rest of the world. We see medium- to long-term upside potential in the euro, British pound, Swiss franc, and Australian dollar against the US dollar. We think investors should diversify across G10 currencies, or into select emerging market currencies and gold.

So that's for 2021, but what about further in the future?

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. We think average returns across traditional assets will be lower than in recent years, meaning investors will need to take on more risk to achieve return targets. But the world will also be "more digital", and, hopefully, "more sustainable", presenting plenty of opportunities for portfolio growth.

If technology was the big thing over the last decade, what's going to be "The Next Big Thing"? History tells us that what worked in the last decade rarely works in the next. We think "The Next Big Thing" will not come in technology itself, but among those companies using technology to disrupt other sectors. We see particular opportunity in the fintech and healthtech spaces, and are also optimistic on the prospects for companies that are positioned to harness the global rollout of 5G technology.

Another area where we see significant potential is in greentech, particularly given the pledges made by Europe and China to be carbon neutral by 2050 and 2060, respectively. For example, companies involved with batterypowered vehicles and renewable energy should benefit from helping transform our economies to become low-carbon. And that's just part of the growing range of sustainable investing opportunities, which has made sustainable investing our preferred approach for investors globally.

Finally, in a lower return world, we continue to see opportunity for longterm investors to diversify into private markets, which can potentially help both diversify and enhance portfolio returns, while also offering investors unique access to growth industries.

Mark Haefele


Bottom line

We think 2021 will be a Year of Renewal, with a shift back toward pre-pandemic norms, while simultaneously accelerating forward into the post-pandemic future. In our new Year Ahead 2021 report, we look at how investors can prepare. We recommend that investors diversify for the next leg, hunt for yield, and position for a weaker dollar. Our report also looks at longer-term opportunities in a decade of transformation. We recommend investing in "The Next Big Thing," buying into sustainability, and diversifying into private markets.


Recommended reading