2021 outlook – the global view: seizing the new reality

Financial markets moving from ‘hope’ to ‘growth’ phase
December 1, 2020
2021 outlook – the Asia view: demonstrating resilience
December 4, 2020

MEDIA RELEASE: 2020 has been a year like no other in living memory. It serves as a reminder that crises can strike at any time, and that each one is different. This report aims to identify the main themes that will drive our new reality in 2021, with Fidelity’s global investment experts weighing in on how they expect markets to respond. 

Key Takeaways

  • Vaccines could be a game-changer, but near-term economic damage is unavoidable
  • The scale of fiscal policy decisions will affect the speed of recovery in the real economy
  • Money supply growth has jumped in response to Covid-19 and asset price inflation could feed through into consumer prices, causing market tantrums. Debt levels are a concern
  • Equity valuations are stretched; there are opportunities beneath the surface, but watch out for sudden rotations

Read the full report here.

The view from the top 

Andrew McCaffery, Global CIO, Asset Management, at Fidelity International comments:

“In 2020, investors consistently chose to believe the best-case scenario, buoyed by liquidity from the Fed and other major central banks. I am concerned that this optimism will not always be matched by the economic reality of 2021. A huge amount of investment has been brought forward to sustain shuttered economies and, given the likelihood of a divided US Congress, a limited fiscal stimulus package could mean a slower recovery. There is a risk in the near-term of a double-dip recession in the US if more restrictions are imposed to tackle the virus while the world waits for vaccines to be delivered across populations.

“Valuations of some US mega caps appear to be detached from reality, with some stocks trading

at over 100 times their earnings. Unless earnings meet current expectations in 2020 and 2021, these stocks remain vulnerable. Any correction could have an outsized impact on the wider market, given the tech giants now account for over a fifth of the S&P 500 index. 

“Scratch beneath the surface, however, there are a range of possibilities where valuations

have diverged due to the pandemic and longer-term trends. Investors may need to act quickly

to capture these bargains in what is still an ‘on/ off’ market. Depending on the virus’s evolution, a vaccine and any policy response, there may be sharp rotations from non-cyclicals to cyclicals or vice versa, though banks and oil companies will remain under structural pressure.”

Macro view: The elephant in the room – debt

Salman Ahmed, Global Head of Macro and Strategic Asset Allocation at Fidelity International comments: 

“The path of recovery in 2021 is unlikely to be smooth. The rollout of a Covid-19 vaccine may

come too late to stop another severe virus wave and the economic disruption may only be partially mitigated by a more modest fiscal impulse in the US. In the medium term, the recovery will depend on how well the sharp expansion of debt to deal with the Covid crisis is managed and which path countries take towards debt sustainability (voluntarily or involuntarily). Many of the transformational changes in macro policy and economic models triggered by the Covid crisis are yet to play out, including how we deal with the even bigger threat of climate change. In that context, the elephant has only just entered the room.”

Equities: A delicate balancing act 

Romain Boscher, Global CIO, Equities, at Fidelity International comments: 

“For much of 2020, investors banked on a best-case economic scenario and a V-shaped recovery, given confidence by the level of monetary and fiscal stimulus that followed the first wave of the virus. 

But there is another letter in this alphabet economics: a possible K-shaped outcome where valuations diverge sharply between those sectors and stocks perceived to be winners and those

spurned as losers. Markets may also whipsaw between the competing forces of abundant liquidity and economic damage, but earnings will be the yardstick to measure corporate performance in the long term. Despite dividend cuts in certain sectors, equities continue to offer a yield cushion of around 2-3 per cent that still looks attractive in a world of near-zero rates.”

Fixed Income: Monetary policy to the rescue, but duration tantrums are possible 

Steve Ellis, Global CIO, Fixed Income, at Fidelity International comments: 

“Central banks have been on the frontline of the Covid-19 crisis and will remain the biggest game in town if US fiscal support proves limited. There is little sign of balance sheet tapering or rate rises on the horizon. However, the possibility of a vaccine emerging in 2021 and the huge monetary and fiscal response to the crisis in an era of ultra-low rates means the risk of ’duration tantrums’ (i.e. spikes in longer-dated bond yields) persists.”

Multi Asset: The hunt for yield could intensify  

Henk-Jan Rikkerink, Global Head of Solutions and Multi Asset, at Fidelity International, comments: 

“If monetary policy remains highly accommodative and fiscal support is relatively modest, the hunt for yield could intensify through 2021. From a risk-reward perspective, we expect decent compensation for exposure to high yield bonds and emerging market debt if the credit default cycle evolves in a moderately positive direction over the coming year. Within high yield bonds, we prefer Asian securities, given stronger underlying credit fundamentals and regional growth.”

Read the full report here.