Institutional investors are looking beyond the turbulence and uncertainty of the US elections, as well as the resurgence of Covid-19 infections in the US and Europe, to the positive prospects for the development of vaccines as they shape their investment outlook for 2021.
“Positive Covid vaccine developments reinforce our expectation that the economic restart can gather steam again in 2021, even as the virus resurgence and renewed tighter restrictions look set to disrupt activity in the near term,” says Jean Boivin, head of BlackRock Investment Institute.
This was echoed by David Bailin, chief investment officer of Citi Private Bank, who says: “The trifecta of knowing who the next [US] president will be, that the end of the pandemic is at hand, and that sufficient economic stimulus will be available for the interim will mark the bright start of the New Economic Cycle in 2021. We remind readers that a healthcare solution to Covid is a far more important global economic catalyst to come than any US political changes.”
In Hong Kong, Tai Hui, chief investment strategist for J.P. Morgan Asset Management, also says: “Investors are looking further ahead in the pandemic development into 2021, instead of focusing on the very challenging outbreak that’s taking place in the US and Europe now. We may continue to get news on vaccine development in coming weeks, as other companies are due to report their findings. Those companies who have made progress should be seeking approval as well.”
This positive outlook by the world’s leading asset managers indicates that 2021 is likely to be a much better year for the global economy and the financial markets than the virus-plagued 2020.
Having said that, global asset managers do not expect 2021 to be a walk in the park as the US and Europe continue to reel from the massive onslaught of rising infections going to Christmas holidays and the year-end.
In Europe, a sharp rise in Covid hospitalization rates has led to the re-imposition of national lockdowns, albeit not as stringent as in the spring, while in the US record hospitalizations have been reported, along with rapidly growing case numbers and rising fatalities.
“Evidence of permanent damages is limited so far for economies as a whole but the adjustment to a post-Covid world could be painful, especially for contact-intensive sectors if mobility is curtailed for an extended period of time,” Boivin says.
In terms of investment outlook, Blackrock is taking a moderately pro-risk approach with an overweight in high yield on both strategic and tactical horizons. The company is tactically overweight broad emerging markets (EM), Asia ex-Japan equities and the size style factor in the US, and have closed its overweight in European equities.
“With the vaccine news, we have even greater visibility on how the cumulative activity loss will likely be limited – just a fraction of that seen after the [global financial crisis] in our estimate – even as we expect a renewed surge in infections and resulting restrictions to disrupt the restart in the near term,” Boivin says.
Although the vaccine is still months away from being widely available, BlackRock believes it is a game changer that provides more clarity for governments and companies about getting to the post-Covid stage and provides a constructive backdrop for risk assets approaching 2021.
According to Hui, there is growing consensus that sectors hardest hit by the pandemic should outperform when a sustained solution to the pandemic is finally attained.
Overall, J.P. Morgan believes the global economy is in an early phase of the recovery cycle and hence is constructive on risk assets such as equities, corporate bonds and EM debt.
“Equity sector rotation could dominate investor discussion in coming months and we think investors can look to diversify their allocations to take advantage of potential good news on vaccine development in sectors that have underperformed in the past six months. By region, this suggests using the US, Asia and China as core allocations for an equity portfolio, and gradually adding Europe, Japan and EM ex-Asia to take advantage of their attractive valuations,” Hui says.
Citi’s Bailin says US foreign policy will enter a more predictable phase without escalating tariff threats. “We see a declining US dollar and rising emerging markets as highly likely. In contrast, the fate of regulation for large tech firms remains wide open as the assumption that Congress is too divided to challenge them seems dubious.”