Once our world emerges from the shadow of the COVID-19 pandemic, it will only be natural for us to “live backwards” as we examine how this challenging period affected our lives. As individuals, we can all recall how it felt to see our cities empty out as the world went into lockdown, as well as our worries about what would happen to our families and friends. What is for sure is that none of us will ever forget that 2020 was the year when we were all confronted with a global pandemic of a deadly virus.
The crisis was also an extraordinary experience for investors as it pushed the global economy into its deepest recession since World War II. Equity markets plunged in late February and March, then rallied strongly in the subsequent months thanks to unprecedented support from central banks and governments.
As we move forward, the pandemic will continue to occupy us in 2021. Governments will have new COVID-19 outbreaks to battle, and will need to distribute a vaccine to their population once it becomes available. Additionally, people and businesses will need to adapt to what we believe will be permanent changes in the way we work, learn and live.
Finally, while economic growth should normalize after the pandemic-induced shock in 2020, there are risks that still need to be monitored carefully. In the following pages, we explore the outlook for the different asset classes and the global economy in 2021.
Global economy
The year 2020 has been like no other. The global lockdown during the first wave of the COVID-19 pandemic triggered the strongest economic contraction in modern history. Most economies recovered sharply thereafter, but a second wave of COVID-19 set the economy back again. Yet growth should accelerate gradually in 2021 without triggering a rise in inflation or interest rates, despite much higher government debt.
Equities
Equities offer attractive return prospects as we move into 2021. The broad political backdrop should remain supportive given very loose monetary policies globally and continued fiscal support. The earnings slump in 2020 due to the pandemic should prove to be transitory. Consensus forecasts for global equities imply that 2021 earnings will exceed the 2019 level, which should support equities over the course of the year.
Currencies
We expect further USD declines in 2021 on the back of improving global growth, a deteriorating US real yield advantage and the widening of fiscal and external deficits. The EUR and JPY should benefit from this trend. We believe the CNY will also gain, supported by portfolio flows.
Real estate
The economic recovery and low interest-rate environment should be favorable for real estate investments in 2021, even though COVID-19 represents an ongoing challenge for certain market segments. We favor sectors underpinned by structural growth such as industrial and logistics real estate.
Hedge funds
We expect hedge funds (HFs) to deliver low single-digit returns, with volatility comparable to that of investment grade (IG) bonds in the USA and UK. As such, we believe that HFs are viable alternatives to stabilize portfolios. Although trading conditions for HFs are set to improve going into 2021, due diligence remains critical.
Commodities
Commodities witnessed a turbulent 2020. Gold reached new all-time highs while cyclical markets hit deep crisis troughs from which they were still recovering at the time of writing. Going into 2021, we think the backdrop should stay conducive for real assets and commodities in particular.
Oil demand outpacing supply
In terms of commodity-specific dynamics, demand for most commodities including oil has yet to recover to pre COVID-19 levels and is unlikely to do so in 2021. However, the crisis has left considerable capital expenditure holes and caused new projects to be deferred or even scrapped altogether, leaving supply more constrained than demand. As a consequence, large inventories that accumulated during the most acute shock phase are projected to normalize, which should ultimately lift spot prices and lead to flattening forward curves.
-Keep an eye on inflation
While inflationary pressures have remained muted and are not a major concern near-term, the inflation discussion deserves some attention in light of current policy measures and rising debt burdens. In this context, we note that a broad basket of commodities, including gold, provided a good inflation hedge in the past. For effective shelter, investors should be exposed to elements that spur inflation, e.g. energy and agriculture prices among others, while gold reacts positively to higher price levels if central bank actions are seen as causing an inflation overshoot.
- What the risks are
The main risk to a positive commodities view would come from a much weaker than expected growth environment, which could be caused by renewed lockdowns triggered by a negative development of the COVID-19 pandemic. Conversely, rapid vaccine success could accelerate the rebalancing processes. Trade disputes and tariffs can also weigh on activity and commodity demand, as we saw in 2019.
Reference: Credit Suisse
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