Outlook 2021 - Searching for some sort of normal

CIO MONTHLY | DECEMBER 2020

As 2020 draws to a close, transition in the White House is underway and vaccine discoveries are lowering the likelihood of another damaging lockdown. Policymakers also look intent on sustaining historic stimulus, with interest rates pegged at zero for several years. While growth could fade and market volatility rise into the end of the year, we are choosing to edge more overweight equities for 2021. Our moderate economic recovery outlook supports equity overweights to Australia, Europe and emerging markets.


  • Short-term uncertainty remains over the likely path of future activity - The coming months will be dominated by key risks. Firstly, the rapid resurgence of the COVID-19 pandemic across the US and Europe; and secondly, uncertainty over a complicated transition of US leadership, and the decisions on trade and defence that may flow from the White House before the January 2021 inauguration.
  • We’re still on track for a moderate U-shaped recovery – Beyond the next few months, several drivers suggest our long-held moderate (albeit stop/start) global and domestic recovery remains on track. These include historic near-zero interest rates and elevated liquidity; sustained government support; and elevated household savings rates, which reflect a combination of government payments and reduced consumption. These factors, combined with news of a number of vaccine discoveries, should reinforce governments’ reluctance to return entire economies to damaging lockdowns.
  • Forecasts for global growth have been edging higher – The latest forecast for 2021 growth from the International Monetary Fund is 5.2%, while UBS has upgraded its forecast from 5.3% to 6.1%. Growth of around 5% would be the fastest pace since the post-GFC rebound. Still, activity is likely to remain below pre-COVID levels until late 2021. Even so, a synchronised recovery should underpin a weaker US dollar, some drift higher in inflation (though to levels that are still below central bank targets), as well as a modest rise in bond yields (on the back of improving growth and inflation trends). Key risks to an improving growth outlook are delayed vaccine approvals until late 2021; a surprise burst of inflation; and consumers proving highly cautious, despite a vaccine.
  • Outlook for fixed income – Despite the RBA’s historic $100 billion bond buy-back program to control the yield curve, the Government’s implementation of larger fiscal measures and increasing supply of both state and government bonds, we will likely see yield curves steepen with longer-dated rates rising modestly through the year. We favour keeping duration low by investing in floating rate products, private debt managed by best-in-class managers, and investment grade credit, while taking profit on high-yield fixed rate bonds.
  • Outlook for the Australian dollar – Our relatively more up-beat macro outlook for Australia should support a trend rise in the Aussie dollar, despite its vulnerability to risk-off events. For end-2021, UBS forecasts a rise in the currency to USD 0.77, while CBA predicts USD 0.78, gains of 6-7% from current levels.
  • Outlook for alternative investments – Overall, the medium-term opportunity set for alternatives has improved in the wake of the global pandemic. We see three key themes to watch in 2021. Firstly, we believe that further dislocations remain across both equity and credit markets, providing a favourable environment for nimble hedge fund strategies and providers of structured liquidity. Secondly, with the likelihood of near-zero rates for multiple years, institutional investors are looking to both alternative credit and global real assets for defensive yield. We believe this heightened demand will drive strong performance in this space. Thirdly, venture and growth capital are poised to take advantage of technology trends, and we expect this will drive value creation for years to come.
  • Outlook for equities – Equity strategists are forecasting a double-digit return for global equities by end-2021. Fundamental supports for further gains are stimulatory policy; the risk-adjusted return pick-up of equities over bonds; and the beginning of a bond-for-equity switch, with bonds now arguably offering less diversification. The backdrop for domestic equities remains positive. With the prospects of a global recovery underpinning the materials sector, and a healthcare sector that has been less defensive than usual (due to COVID-19), 60% of the domestic market now looks leveraged to stronger post-COVID conditions.