To read the full article, see the Investment Strategy Quarterly publication linked here.
The first-ever postponement of the Summer Olympics exemplifies the depths of disruption the pandemic has caused. However, the concept of the torch is associated with hope, light and strength, an excellent metaphor for the rescheduled start date – July 23, 2021 – likely coinciding with the sustainable reopening of many parts of the world.
As a salute to everyone that has done their part to make this happen – from scientists to frontline workers to the athletes themselves – and to set our sights on a more uplifting time period, we’ve chosen the Summer Games as the backdrop for our ten themes for 2021.
Nineteen of the twenty largest economies in the world experienced a contraction in growth in 2020, but we expect the entire crew to see positive growth in 2021. The coxswain of the recovery will be global central banks, led by the Federal Reserve (Fed), as its decisions to keep interest rates low and liquidity robust will ultimately dictate the power and pace of the global economic recovery.
The recovery will be defined by transitional periods with varying paces throughout the year. At the onset, worsening COVID trends and paused reopening processes will prove to be a challenge. Analogous to swimming, the first leg of the triathlon, the pace will be slower and the waters may be choppy. However, by the spring, economic growth will accelerate as the dissemination of vaccines push the pedal for more businesses to safely reopen. Toward the end of the year, we expect to reach a steadier stride, finishing at a slower but more sustainable pace.
Fencing requires agility, coordination, balance, and timing – the same skill set global central banks displayed when adjusting interest rates in light of the COVID-19 pandemic. This year, acceleration in economic growth should thrust the yield back to the 1.50% level by year end, but low inflation, central bank buying, strong foreign demand and the growing economic sensitivity to higher yields will parry yields from returning to levels near 2% on a sustainable basis.
We remain positive on equities over the next 12 months, but it will be a powerful earnings rebound (20%+ earnings per share growth in 2021) that will raise the bar. Earnings are often revised higher in the period following a recession, so when combined with tailwinds such as multiple vaccines and additional fiscal stimulus, the S&P 500 will likely reach 4,025 by year end.
Archery incorporates both accuracy and precision, the same qualities we aim to possess as we determine our preferred sectors. Information technology has been the top-performing sector for three of the last four years, and we believe the rollout of 5G and the manner in which the pandemic altered the way companies conduct business will be additional arrows in the sector’s quiver. Given the tech-based adaptations in other industries, we believe investors can still score points with the healthcare, consumer discretionary, communication services and industrials sectors.
The sport of surfing began prior to 1770, but it will make its Olympic debut this year. Similarly, the principals of environmental, social, and corporate governance (ESG) investing have been practiced for decades, but between the Biden administration and the lingering impacts of the COVID-19 pandemic, the ESG wave is expected to grow.
The uneven bars are one of the four events for female gymnasts, but they are also prevalent in our equity allocation preferences, as our bias toward U.S. equities remains intact. The broad-based global economic recovery would typically lead us to be more flexible with international exposure, but the sector allocation in Europe has garnered the region a few deductions. However, our preferred sectors, along with expectations for a weakening dollar and attractive valuations, present a favorable outlook for emerging market equities.
The global economy’s recovery, ongoing aggressive fiscal and monetary policy action, a growing budget deficit, and – more likely than not – easing trading restrictions with China and our allies will all serve as hurdles in the dollar’s path, preventing it from moving higher. Ultimately, the weakening of the dollar may pass the baton to emerging market equities, emerging market bonds, commodities and U.S. multinational companies.
2020 was anything but smooth sailing for the oil industry, as the Saudi-Russia oil price war and virus-induced lockdowns weighed heavily on oil prices. In 2021, a sustainable return to normality is expected to cause the best rebound in global oil demand since 1973. The gradual rise in oil prices (WTI Crude $60 per barrel year-end target) should put wind in the sails of the industry’s lagging recovery, but with the environment a top campaign issue for president-elect Biden, a renewable energy storm is on the horizon.
We expect overall market volatility to be more palatable in the year ahead, driven by the gradual reopening of the economy, more stable monetary policy and less political risk. But just because volatility won’t be on par with that of 2020 does not make adherence to asset allocation parameters any less important. With pullbacks still a natural occurrence for the equity market, it is critical that investors have a strategy in place for when the times get rough so that emotionally-driven investment decisions don’t lead portfolios into hazards.