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3 key drivers for markets in 2021

By Opinion Time of article published Jan 28, 2021

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By Graham Wainer

2020 was a defining and historic year, characterised by an unprecedented global health crisis and peacetime policy response. The contrast between the current economic freeze and future optimism suggests it’s darkest before the dawn, with a realistic prospect of the pandemic improving over the coming months as the global vaccination roll-out accelerates.

Against the backdrop of a meaningful moderation in the pandemic and reduced geopolitical risk, three key drivers for markets and investment strategy in 2021 are evident.

Risk assets will remain supported

First, as a result of a surprisingly sharp recovery from last year’s lows, investors can expect risk assets to remain well supported by a favourable mix of economic recovery and expansionary monetary and fiscal policy.

This does not mean that the almost uninterrupted uptrend in equities since March last year will continue throughout 2021. With the global economy still held to ransom by the virus resurgence, higher volatility will come as no surprise. However, for long-term investors focused on growing real capital over time, equities hold an important advantage. Valuations may be elevated relative to history, but traditional alternatives for generating income and capital growth are very scarce. The pandemic, and associated monetary stimulus packages, have flattened long dated bond yields to near zero and left the global equity market with few realistic competitors for capital.

History tells us that it is rare for bonds to outperform equities over the long term, and as capital markets enter a new cycle with such paltry bond yields, there is little reason to expect a different outcome in the future. On this basis, short-term volatility may present good entry points for capital deployment.

Dominance of ‘pandemic beneficiaries’ will subside

Secondly, the equity market dominance of ‘pandemic beneficiaries’, such as mega-cap technology stocks, is likely to subside as the recovery broadens and new leaders emerge.

For global investors this presents opportunities to recycle capital across regions and industries while retaining a prudently balanced portfolio. Although the coming year is laden with uncertainties, particularly with respect to how quickly the recovery can take shape, investors may be confident that we are now passing through the worst of the health crisis.

Certainly, it remains the case that industry disrupters such as Facebook, Amazon, Apple and Netflix hold strong competitive advantages and can continue to compound earnings at an attractive pace.

However, there are also opportunities outside the US market, where parts of Europe, Asia and the emerging world can benefit from a rebound in capital flows. Within regional markets, an end to the persistent flattening in bond yields also has the potential to remove an important headwind for ‘value’ stocks, which are often highly sensitive to the economic cycle. Such market rotation is common in the early stages of a new economic cycle, when growth is recovering sharply.

ESG and sustainability themes will grow

Finally, as investment themes, Environment, Social and Governance (ESG) and sustainability have been growing in prominence in recent years, as investors reflect their personal values in their portfolios. However, in 2021, investors can expect this theme to be embedded across the investment landscape. Corporate reporting on sustainability is now the norm.

The 2020 KPMG Survey of Sustainability Reporting found almost all (96%) of the world’s largest 250 companies report on their sustainability performance. For the 5,200 companies comprising the largest 100 firms in 52 countries, 80% do so. This broad availability of sustainability metrics enables investors to reward ‘good behaviour’ accordingly.

As the definition of a ‘quality’ company evolves to reflect a sustainable and responsible business model, as well as a strong balance sheet and steady cash flow stream, this trend is expected to continue.

2020 reminded us all of the future’s unpredictability. Looking forward, ever present ‘unknown unknowns’ justify the existence of diversifying assets in otherwise ‘growth-focused’ portfolios.

However, there are multiple risks that can be identified and used to evaluate investment strategy against. The potential for the pandemic to persist for longer than hoped for is naturally critical to the economic recovery. While it is a small risk, approved vaccines may not prove sufficiently effective in protecting against current or future mutations of Covid-19.

Furthermore, the logistical challenges of immunising billions of citizens globally, in addition to concerns around broad adoption, are vast. The developed world’s vaccination timetable may prove too ambitious.

Nevertheless, we believe it is only a matter of time before these logistical challenges are overcome, and we will continue to be informed by the scientific evidence on vaccination efficacy.

Graham Wainer is Group CIO of Stonehage Fleming Investment Management


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