We have identified the following key themes, which will have a significant effect on portfolios over the coming year. We are incorporating these views into our discretionary assets and multi-asset funds for the benefit of our clients.
1. POSITIONING FOR GROWTH OPPORTUNITIES
While rising Covid-19 infection rates are likely to curtail the recovery over the winter months, we expect a strong economic recovery in 2021. To date, governments and monetary authorities have reduced the economic impact of shutdowns, and will look to provide ongoing support to economies hampered by new Covid-19 restrictions through early next year. This, coupled with the positive news of viable vaccines becoming widely available in the coming months, should allow economies to re-open, leading to a robust recovery in the second half of the year. We believe this favourable backdrop will support ‘growth’ assets, while at the same time enabling yields on government bonds to remain low. This will also support higher equity-market valuations.
2. RATES SET TO BE LOWER FOR LONGER
We expect government bond yields to stay low in 2021, as central banks keep interest rates low for the foreseeable future. Monetary authorities are also expected to maintain their bond purchase programmes, which will be a strong support for bond markets. This, in turn, will allow governments to finance higher budget deficits and debt burdens stemming from economic support programmes. Improving growth and increased deficits do pose the risk that longer-dated bond yields may rise, especially if we see rising inflation expectations or further fiscal expansion. However, we believe a fundamental shift to a higher-yield environment is unlikely in the near term. In such a low-yield world, we see value in corporate bonds, better-quality high yield and emerging-market debt. We prefer these to high-quality eurozone government bonds.
Regulatory and policy responses to sustainability issues are accelerating globally, leading the transition of capital to sustainable investments and meeting client demands for sustainable investment options. We believe that consideration of environmental, social and governance (ESG) factors is an integral part of the risk-management process for all asset classes and that systematically considering ESG issues will lead to more sustainable long-term investment outcomes. We have integrated ESG factors across our discretionary equity and property portfolios, and are extending this approach to fixed income and alternatives over the first quarter of 2021.
4. THE CHALLENGE OF DIVERSIFICATION AND INCOME GENERATION
Although expectations for equity markets are high, we are still mindful of future risks and volatility as the world assesses the lasting impacts of Covid-19 on business models and government finances. Historically, investors have turned to government bonds, as they have acted as a ‘safe haven’, providing both an income and the prospect of strong positive returns during economic downturns. However, given such low starting yields, government bonds offer little income or limited upside potential and are vulnerable if there was a pickup in inflation, forcing investors to rethink their approach to both diversification and income generation. While higher-quality credit and emerging-market debt markets provide an income uplift versus government bonds, such allocations do come with an associated higher risk, albeit less than equities. We believe this dual diversification and income challenge facing investors supports the case for considering alternatives and real assets, such as real estate and infrastructure. These offer attractive yields and stable income-generating characteristics, while also providing diversification benefits versus more
traditional growth assets.