Following a particularly challenging year for investing, we’ve identified five themes we’ll be watching closely throughout 2021.
The coronavirus pandemic made conditions particularly challenging for investors throughout 2020. After a year when everything seemed to change, what’s likely to drive the global economy and financial markets in 2021?
These are the five themes we believe will influence our investment decisions the most as we navigate the evolving environment.
We believe the pandemic will recede this year and the global economy will heal gradually. To help understand how industry sectors are likely to perform, we can divide them into three
— benefited from the lockdowns;
— suffered and are vaccine dependent; or
— were only partially impacted but sensitive to the policy response.
From a geographical perspective, some regions have contained the spread of the virus more effectively than others and are bouncing back more rapidly. Many Asian countries have avoided prolonged lockdowns. With the recovery heading in the right direction, we’re confident about the outlook for company profits and stock market returns.
We expect inflation to pick up in 2020 but not dramatically. The pandemic has forced unemployment higher and created spare capacity in the economy. those who have saved most during the pandemic are more likely to reduce debt or top up their pensions than spend.
We do not expect the tide to meaningfully turn for the assets that have benefited from low inflation – notably government bonds and growth companies. With yields already at record lows, new buyers of bonds receive only a small income, and the potential for capital gains appears slim. Similarly, in equity markets, we believe better investment opportunities lie outside growth companies.
Although the health crisis has challenged globalisation, there have been some developments in regional integration. For example, Australia, New Zealand, and 13 Asian countries, including China, signed the Regional Comprehensive Economic Partnership in 2020. In the US, Joe Biden’s economic team has indicated it wants to engage with the rest of the world in a more cooperative way.
From an investment perspective, we believe Asian emerging markets are best positioned to prosper in this environment. Many are increasingly self-reliant, moving away from exporting goods to
developed markets. They offer a rich source of successful businesses across a range of sectors, from luxury goods to innovative technology and financial services companies.
The companies whose fortunes have been most obviously lifted by the pandemic conduct their business over the internet. While they have the potential to keep growing their earnings by entering new markets and launching innovative products and services, policy and regulation can have a significant impact on their business models.
Another issue for the large firms is market saturation and whether they have enough room to continue growing in order to justify their valuations and the potential for further share price gains.
However, we continue to believe the technology sector provides opportunities to invest in companies with disruptive business models that are revolutionising their industries and addressing changing consumer needs.
The pandemic has put environmental concerns and social inequalities in the spotlight, and policymakers have responded by declaring the recovery can improve the world by “building back better”. For example, the EU has earmarked around a third of its €750 billion recovery fund to fighting climate change. Other regions have made similar commitments.
There are lots of ways we can gain exposure to companies that have the potential to benefit from government spending packages and policies designed to support a sustainable recovery. Although we don’t select the investment managers in our portfolios based on their ESG credentials, we do expect that they will integrate these risks and rewards into their processes.
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Note: The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested. Your home may be repossessed if you do not keep up repayments on your mortgage.