The Old Normal – 2021 Global Market Outlook

COVID-19 vaccine prospects should make 2021 a year of global economic recovery. Markets have priced in a lot of good news, but more gains seem possible as corporate profits rebound and central banks remain on hold.

“We have a positive medium-term outlook for economies and corporate earnings. We’re in the early post-recession recovery phase of the cycle, which implies an extended period of low- inflation, low-interest rate growth that favors equities over bonds.”

-Andrew Pease, Head of Global Investment Strategy

Introduction

2020 was a year of surprises. There was the speed at which the pandemic escalated, the severity of the lockdowns, the size of the government stimulus measures globally and the magnitude of the equity market rebounds. Perhaps the biggest surprise is that global equities, as of late November, have gained around 12% since the beginning of the year—an outcome few would have predicted during a global pandemic. With the U.S. election behind us and effective vaccines on the way, investors have become bullish, pushing the S&P 500® index to record highs.

Likewise, we have a positive medium-term outlook for economies and corporate earnings. We’re in the early post- recession recovery phase of the cycle. This implies an extended period of low-inflation, low-interest rate growth that favors equities over bonds. There are some near-term risks, however. Investor sentiment has become overly optimistic following
the vaccine announcements, markets vulnerable to negative news. This could include renewed lockdowns in Europe and North America as virus cases escalate, logistical difficulties in distributing the vaccine and negative economic growth in early 2021 if government support measures are unwound too quickly. Geopolitics could also deliver negative surprises from China, Iran or Russia as the new Biden administration takes power in the U.S.
Our cycle, value and sentiment (CVS) investment decision-making process scores global equities as expensive (with the very expensive U.S. market offsetting better value elsewhere), sentiment as overbought and the cycle as supportive. This leaves us slightly cautious on the near-term outlook, but moderately positive for the medium-term with expensive valuation offset by the positive cycle outlook.

Overall, we see the following asset class implications for 2021:

-Equities should outperform bonds.

-Long-term bond yields should rise, though with steeper yield curves likely limited by continued low inflation and central banks remaining on hold.

-The U.S. dollar will likely weaken given its countercyclical nature.

-Non-U.S. equities to outperform given their more cyclical nature and relative valuation advantage over U.S. stocks.

-The value equity factor to outperform the growth factor.

A return to normal by the second half of the year should help extend the rotation that began in early November away from technology/growth leadership toward cyclical/value stocks. During the COVID-19 pandemic, technology and growth stocks enjoyed tailwinds from a boost to earnings and lower discount rates. These tailwinds should become headwinds once a vaccine is available and lockdowns have been eased. This should allow the normal early-cycle recovery dynamics to resume, with investors rotating towards relatively cheaper value and non- U.S. stocks that should benefit from the return to more normal economic activity.

Read the full report here:

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