After such a tumultuous 2020, what does 2021 hold for us? We believe there are four major factors that will determine the outlook for equity markets: distribution of vaccines, outlook for government and central bank policies, extent to which government bond yields will (be allowed to) rise and performance of the US dollar. On balance, we think these factors will continue to fuel the ongoing recovery of the global economy, equity markets and income-generating assets.
The news on the vaccine front looks positive, with major economies already starting to inoculate frontline medical workers, the elderly and other critical segment of the population. Of course, there are logistical challenges to producing and distributing the vaccines on a sufficient scale especially to the smaller markets and difficult-to-reach locations. However, we believe in the power of human ingenuity to resolve these issues, which means we should be able to put this pandemic behind us in 2021.
Meanwhile, governments and central banks are likely to continue doing everything in their power to sustain economic recovery. This means additional fiscal packages and continued debt monetisation, in all but name, in the coming months. These measures should keep bond yields capped and drive the US dollar weaker.
What does this mean for investors?
Our view is that we are in a relatively early stage of a long-term equity bull market. There is still plenty of excess capacity in the global economy, which means inflationary pressures are likely to be generally muted, allowing central banks to continue focusing on supporting growth rather than fighting inflation.
In 2021, a weaker US dollar is likely to be a strong tailwind for investors. Historically, a weak US dollar environment has been very positive for most asset class returns.
Of course, investor concerns over the elevated level of equity market valuations is valid. However, investors are faced with high valuations almost everywhere they look. Deposit rates and bond yields are mostly below the level of inflation – meaning that investments here are likely to lose purchasing power. To us, this means investors looking to preserve and grow their wealth will increasingly be forced to look to riskier asset classes, such as equities, higher yielding corporate bonds and other alternative assets, such as real estate.
While we cannot rule out short-term equity market pullbacks, we believe such reversals are likely to be relatively short-lived, given the policymakers backstop. Against this backdrop, we believe avoiding an all-or-nothing investment approach will be critical to one’s long-term success.
Drip-feeding investments in a planned way into a diversified basket of financial and alternative assets would reduce the risk of panic selling in the face of short-term market fluctuations. This approach would ensure you have skin in the game if the market goes up, and conversely, still have more cash to deploy at cheaper levels if the market falls.
These are easier emotions to deal with than being 100% wrong by staying out of the market and watching your hard-earned savings being gradually depleted by inflation.