Market Outlook 2021 The road back to normal

Market outlook 2021: Evan Brown, head of macro asset allocation at UBS Asset Management told investors there’s more positive news around vaccine announcements and this would boost global GDP next year

27 Nov 2020

We just keep getting vaccine announcements that are extraordinarily positive … vaccines that are showing efficacy above 90%, much higher than expectation.

They are set to roll out over the coming weeks .. broadly to populations around the world. Some countries could reach herd immunity as soon as mid-2021 and that can lead to a significant rebound in the global economy next year, perhaps as much as 6% global GDP growth in 2021

Evan Brown, Head of Macro Asset Allocation

How will markets price in the near-term negative news (of increased COVID-19 cases in the West) versus the medium-term positive news (of vaccine development)?

Right now, the vaccine story is winning, but into year end or, early next year, there’s going to be a little bit more 2-way a price action that we're seeing here …

"When we do get dips in the more cyclical sectors … those are dips to be bought and we definitely do like rotating into the more cyclical areas of the markets right now."

What does the Biden administration mean for US/China relation?

There will continue to be strategic competition between the two countries, focused in particular on technology.

All that said, the areas of focus, I think, are going to shift somewhat with the Biden administration. Biden is not a tariff man like President Trump calls himself.

"We do think he will de-emphasized trade policy and tariffs, to the point where … actually tariffs begins do get removed somewhat, and as part of a partial reset in relations between the two countries. That would be a very helpful tailwind for the global economy and we see it as a good environment for global credit, particularly in Asia"

Chinese bonds a stand-out in Asian credit

Evan Brown and team has put together "Market Outlook 2021 - The Road Back to Normal" which also discussed the challenges for income generation and attractiveness of emerging markets.

Extracts of the report below.

The challenge for income generation

We believe that the overall macro environment is highly supportive of risk assets, and we have a bias towards procyclical relative value positions. The economic recovery is poised to continue and become more self-sustaining as medical innovations allow for the normalization of private-sector activity.

Real interest rates are negative across advanced economies, and are likely to stay that way through 2021 and beyond. We believe a less aggressive outlook for US fiscal stimulus limits the prospect of a sudden, significant rise in Treasury yields that would have spillovers across international markets. Investors will have to work harder to generate yield.

The appeal of opportunities in multi-asset hedge funds and alternative assets could increase in this low-yield-for-longer environment. Within the publicly traded universe, the progression of the global economic expansion coupled with the low level of yields on developed-market sovereign debt should likely push investors up the risk spectrum. In our view, this makes emerging market dollar-denominated debt, including Chinese government bonds, particularly compelling.

Attractive yield pick-up available in Chinese bonds, dollar-denominated EM debt

Source: UBS Asset Management, Bloomberg. Data as of 10 November 2020.

This chart tracks the JPMorgan Emerging Market Bond Index (EMBI) Global Spread and the China 10-year bond yield from 2016 through November 10, 2020.  

US election impact

The results of the US election provide increased clarity on the economic outlook. President-elect Joe Biden is likely to take office with a Republican Senate. This combination should provide the US economy with adequate additional fiscal support, though not as much as would have been the case in the event of a united Democrat government. In addition, the likelihood of higher taxes has lessened considerably, removing one potential headwind to US earnings growth.

In our view, this election outcome will help foster sustained US dollar weakness, with the protectionism premium embedded in the world’s reserve currency ebbing in light of this change in leadership. We expect the Treasury curve to steepen over time as the expansion makes further headway.

But the potential for ongoing, substantial fiscal stimulus stateside has diminished materially, reducing the odds of a disorderly rise in bond yields that could foster dollar strength. Linked to this outlook for a softer US dollar, the across-the-board outperformance of emerging market assets is our highest conviction view, which is bolstered by the election results.

Economic recovery conducive to outperformance of emerging markets

The broad-based economic recovery is conducive to the outperformance of emerging markets. So too is the relative status of China’s economic comeback, which is in a more advanced phase than any other nation. The resilience in the world’s engine of production and strong credit impulse may continue to bolster global activity, as long as growth in total social financing, imports, and inventories does not moderate too briskly. In our view, this positive influence is a boon for the global market outlook in general, and for emerging markets as well as other procyclical assets in particular.

Beyond the aforementioned attractiveness of dollar-denominated debt in light of current spreads, we also favor emerging market currencies, which have outsized catch-up potential relative to other procyclical trades.

Asset allocation 2021

The Asset class attractiveness chart shows the views of our Asset Allocation team on overall asset class attractiveness, as well as the relative attractiveness within equities, fixed income and currencies, as of 6 November 2020.

1 Source: UBS Asset Management’s Investment Solutions Macro Asset Allocation Strategy team as at 6 November 2020. Views are provided on the basis of a 3–12 month investment horizon, are not necessarily reflective of actual portfolio positioning and are subject to change.

Download our full "Market Outlook 2021 - The Road Back to Normal"

Market outlook 2021

Asset allocation members

Evan Brown

Head of Macro Asset Allocation Strategy

Ryan Primmer

Head of Investment Solutions

Lucas Kawa

Asset Allocation

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