What's in store for investors in 2021?
While 2020 caused the global economy’s most severe economic contraction in decades and triggered vast monetary and fiscal support packages, next year could be very different for investors, according to Lombard Odier.
With the imminent distribution of Covid-19 vaccines across the globe, the Swiss investment bank said mass vaccinations, public health measures and “extraordinary government spending and monetary policy support” should accelerate the economic recovery.
“This vaccine will be a game changer in controlling and containing the pandemic,” said Samy Chaar, chief economist at Lombard Odier. “What we know from 2020 is that when we contain the pandemic economic activity catches up extremely quickly.”
Mr Chaar pointed to Asia, where the economic catch-up in the third quarter of the year was extremely visible once the restrictions were removed.
While Europe has lost about 7 per cent of output this year when compared to last year, the US will only lose 3.5 per cent, and China is expected to be 2 per cent above the output levels seen at the end of last year.
As restrictions are lifted, Mr Chaar expects the US economy to recover its preCovid output in the second or third quarter while Europe might need to wait until the first quarter of 2022.
Mr Chaar said this pattern of uneven economic catch-up will also affect certain sectors with heavily-hit industries, such as leisure, tourism and transport taking longer to recover, while housing, manufacturing and trade are set to outperform.
Equities have been on a roller coaster this year, with global markets suffering a sharp contraction in March at the height of the pandemic, before recovering over the course of the year. The Dow Jones Industrial Average traded above 30,000 points for the first time on Tuesday, buoyed by news of Covid-19 vaccines and the imminent accession to the Oval Office of Joe Biden.
However, the rally stalled on Thursday as European stocks dipped and US futures were mixed after sobering economic data deflated the demand for global risk assets and sentiment turned cautious.
“Twelve months ago, few could have imagined such a tumultuous year ahead. While 2020 will cast a long shadow, we expect next year to deliver a rapid and robust global recovery,” Lombard Odier said.
Here, Stéphane Monier, the bank’s chief investment officer, outlines his 10 investment convictions for next year.
1. Stay invested in risk assets
Positive vaccine developments and continued monetary and fiscal support are set to accelerate the economic recovery.
“Corporate earnings offered a positive third-quarter surprise, and with interest rates expected to stay low, equities should continue to rally with fixed income carry strategies still providing returns,” he said.
2. Maintain a diversified portfolio
Mr Monier warns the vaccine-fuelled recovery will not be a linear process. “The low-yield environment makes traditional portfolio stabilisers, such as domestic government bonds, less efficient,” he said.
As a result, he favours holding a diversified set of hedges ranging from US treasuries, or Chinese government bonds, to gold and the yen.
“Such assets can evolve independently from the equity risk that we want to cushion, and therefore need tactical management,” he said.
3. Hold on to gold, for now
Short-term uncertainties should keep gold prices trading in the $1,850 to $2,000 per ounce range next year, which offers investors an efficient hedge against equity volatility.
“A depreciating US dollar may help the physical demand for gold, but we expect financial demand to remain the strongest price driver,” said Mr Monier.
Later in the year, once a recovery is in place, real rates are back to normal levels and investors have once again increased their exposure to risky assets, he expects gold prices to head towards $1,600.
4. Use carry strategies to generate yield
While the traditional portfolio hedging properties of government fixed income assets may be reduced given the current low yield levels, corporate credit should continue to benefit as investors seek returns.
This dynamic, in an environment of low inflation and anchored monetary policy, will continue, said Mr Monier with emerging market hard currency bonds looking “particularly attractive”.