Signals and strategies - 2020 challenges persist into 2021
CIO MONTHLY | FEBRUARY 2021
Although a renewed global surge in the pandemic in December led to rising mobility restrictions in many regions, equity markets (and bond yields) rose further, reflecting optimism that a growth and earnings recovery lies ahead. With asset valuations remaining stretched, top of mind for 2021 is whether we should, firstly, remain moderately ‘risk on’; and secondly, if so, how are portfolios best managed through a year where volatility is likely to remain elevated and where there are potential risks.
- We have not exited 2020 with a clean slate, with the pandemic still in play in many regions. But, to a significant extent, the drivers of an economic recovery have strengthened.
- Our core positive outlook remains intact, though arguably, the ‘good news’ of falling new virus cases and the reopening of economies may be more evident in Q2 than Q1 of this year.
- There are key macro signals we are watching closely to ascertain whether any disappointment is temporary or whether we need to reshape our thinking. These include the pace of the vaccine rollout (and its success against mutations); whether easing consumer fear and high savings will drive spending; a surprise in inflation pressures; and any change in tone from central banks.
- Despite the macro risks that we are monitoring, we recommend a moderate risk-on position for portfolios. On a three-year horizon, return expectations are under downward pressure. However, sustained low yields should continue to favour returns in equities relative to fixed income. With traditional equity and bond valuations stretched, we continue to recommend full allocations to alternative investments.
- Some of the key strategies for 2021 that we recommend are to bring portfolios in line with strategic positioning; position portfolios to benefit from the equity growth-to-value rotation, which we believe has further to go; consider investing in multi-year structural themes; consider defensive alternatives, such as real assets; build appropriate allocations to alternatives; and look for opportunities to lift cash and yield returns.