Annual House Views - 2021 Outlook - A new dawn

Macro
Recent announcements of three successful anti-COVID-19 vaccines have brought real hope that the pandemic can be brought under control over the next year. There are many logistical challenges of course but significant portions of the most vulnerable parts of the population – healthcare workers and the elderly – could be vaccinated by Spring. Until then, we expect lockdown policies to remain in force – albeit less stringent than at present – for much of Europe and some US states. Asia, which has largely sidestepped the second wave of infections, remains the exception,with growth in industrial production and retail sales currently accelerating in China.

Central Banks
Recent communication from the Federal Reserve (Fed) and European Central Bank (ECB) has reinforced expectations that both will ease policy at their December meetings. Moreover, the Fed is opposing plans by the current Treasury Secretary to withdraw its emergency funds so they can be spent elsewhere, a clear sign that it wants to retain full firepower given the near-term risks to growth. We expect easing to come in the form of enhanced and extended asset purchase programmes – of government and high-quality corporate bonds – to ensure that borrowing costs remain under control. Further, the ECB is likely to offer cheap refinancing to encourage bank lending

Markets
Financial markets tend look ahead rather than worry about near-term risks and the vaccine announcements have fostered a rise in investors’ risk appetite. This means that safe havens – such as government bonds, the dollar or gold – are less in vogue than more cyclically-sensitive assets like equities. Within equities, we expect a shift from “lockdown winners” such as megacap tech and internet stocks, which tend to be extremely expensive, towards more cyclical sectors where valuations are much more attractive. Within fixed income markets, corporate bonds and emerging market debt – especially in Asia – remain our preferred segments.

Bottom line
The rally in high-grade corporate bonds has pushed the yield premium (or “spread”) available on high-grade corporate bonds down close to historic lows and we have moved back to Neutral to lock in some profits. We maintain an Overweight in equities and have upgraded allocations to both Europe and Japan, two rather cyclical markets. With economic activity moving back towards normal over the next twelve months, there is less need for safe havens such as the US dollar and gold and we have scaled back positions. Inaddition, we expect direct exposure to equities to outperform hedged strategies like Hedge Funds and accordingly have reduced allocations to Neutral.

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