House View, December 2020
Our core scenario is that global GDP growth will rebound to 5.6% in 2021, with GDP expected to return to its pre-covid level in Q2. This forecast is premised on an end to the coronavirus pandemic.
Policy accommodation will remain the watchword for central banks in 2021. With the line between fiscal and monetary set to be further blurred, rate hikes are still a distant prospect.
Thanks to a sharp improvement in the consumer sector, our baseline scenario is that US GDP will grow 4.7% in 2021. We also foresee a turnaround in the euro area and UK economies next year, which we expect to grow 4.3% and 6.7%, respectively.
We believe China’s robust recovery will continue, with GDP growing 9.3%, while Japanese GDP could rise 2.7%. Our central scenario is for the Indian economy to grow 10% in fiscal year 2021–22.
We have made numerous changes to our asset-class stance, generally reflecting an economic and corporate climate more favourable to risk investment. Global economic recovery should ensure a broadening of the earnings recovery that will be good for cyclical sectors and for innovative small caps that have managed to maintain strong balance sheets.
Economic policies should favour infrastructure and environment-themed assets. Emerging markets should also do well, although country selection remains paramount.
Core developed-market bonds will keep delivering paltry returns, but we are becoming more upbeat on emerging-market corporate debt in hard currency. We continue to prefer to go down the capital structure of quality debt issuers rather than to venture into the riskier parts of high yield.
The recovery in the global economy should ensure a balance in oil demand and supply next year, with a rise in the Brent oil price from around USD48 in late November 2020 to around USD55 at end-2021.
We believe currencies like the euro and renminbi will make ground against an overvalued US dollar, which will struggle to make headway in 2021. The currencies of export-driven countries should benefit from a reduction of trade tensions, while among defensive currencies our preference goes to the undervalued Japanese yen.
We see earnings on the S&P 500 rising by over 20% in 2021, with growth higher in the sectors hardest hit by the pandemic. As the recovery broadens, structural growth stocks, the big winners this year, could become marginally less attractive. Dividend levels should be safe in the US, while there could be a revival in buybacks.
Sector wise, we are positive on consumer stocks and remain conscious of the trend toward ‘digital everything’ propelled by the crisis. Some segments of the industrials sector will benefit from pent-up demand, while US banks could benefit from a steepening yield curve. With growth momentum still strong, we continue to like large internet stocks.
We believe the backdrop for emerging-market equities will be favourable in 2021, with a weakening US dollar providing an important leg-up.
While we see central banks acting to cap long-term rate rises, government bond yields may progressively come under upward pressure as economic recovery revs up.
We see investment-grade euro credits offering only modest returns, but better prospects for high yield as spreads continue to tighten.
Emerging-market bonds, which offer relatively attractive yields, stand to benefit from the cyclical recovery and US dollar depreciation.
In hedge funds, macro and event-driven strategies should do well in the improving environment while ESG is becoming an increasingly important investment criteria in commercial real estate.