Long-term outlook remains cloudy but 2021 provides rays of optimism for investors.
Whilst 2020 was a year most would choose to forget, it provided the opportunity (albeit without choice) to slow down, reconsider priorities, reconnect with loved ones and learn to manage change — at a monumental pace.
It was a year bookended by bushfires that devastated much of Australia’s east coast, and the most contentious U.S. election since 2000. In between, heightened trade tensions simmered away, which, if not for the worst global pandemic in more than a century, would have been the major investment headline of 2020.
For investors, it was a year in which the full menagerie of spirit animals presented to the market. Bulls and bears exchanged blows as volatility reached all-time highs. Some of the largest monthly market falls on record were followed by some of the biggest monthly gains ever seen — as extensive fiscal stimulus was pumped into the system. Dovish central banks supported markets throughout, and President Biden’s election to the Oval Office prompted concerns about a return of the fiscal hawk embodied by the expected Republican controlled Senate (which didn’t come to be). And of course, amongst all of this was a black swan — the novel coronavirus, COVID-19 — with its impact likely to be felt for years.
Despite the turmoil, markets remarkably finished above the levels at which they started the year. Whilst equity markets — as measured by the MSCI ACWI (hedged 30% to AUD) — closed 7.6% above where they started the year on 1 January 2020 (chart 1), fundamentals and the economic backdrop changed markedly in that same time.
Whilst positive on the near-to-medium term outlook for risk assets, the stimulus packages that supported a 2020 recovery will eventually need to be funded, global cash rates are virtually zero and globalisation appears threatened for quite some time. As a result, we are now less bullish on the longer-term outlook for capital markets and, in October, reduced the return expectations for our diversified portfolios by 0.5% per annum over rolling ten-year periods.
While the ten-year outlook remains cloudy, the purpose of our annual outlook is to focus on 2021, a period in which we now see surprising optimism for investors.
After maintaining an underweight to growth assets for much of 2020, in mid-October we returned portfolios to benchmark ahead of the U.S. election. In November, following a positive election outcome for markets and promising vaccine developments, we shifted to a mild overweight to growth assets as the outlook for a recovery became clearer. We see this positive sentiment continuing in 2021.
It is worthwhile noting that without China, the global economy in 2021 would be unlikely to return to its 2019 output level. Despite this, stock markets are now trading at record highs. How is this possible? 2020 exhibited reasons why investors must discern the differences between economies and markets. Whilst the latter is closely connected to the former, forward looking sentiment has been a more dominant driver of market pricing.
There are three key factors why markets are currently holding their ground whilst economies are suffering:
After more than a decade of growth, the long feared recession has now transpired and seems unlikely to repeat, at least for some time.
The economic recovery is expected to be strong and due to capacity remaining underutilised, brings with it little chance of overheating and the subsequent inflationary pressures that would follow.
Central banks loosened monetary policy considerably at the start of the pandemic; and thanks to the lack of inflationary pressure, have been able to further their commitment to promises of lower rates for even longer.
Despite fundamentals continuing to present headwinds, it is the continued promise of low interest rates from central banks and strong company earnings growth (forecast 25-30% earnings-per-share recovery for most markets), which provides the basis for our optimistic view of equities. This has allowed us to increase our target price-to-earnings ratio for 2021. These factors, coupled with TINA (There Is No Alternative), FOMO (Fear Of Missing Out) and rebounding economic activity, should result in upside potential for equities, in the high single-digits — with Asia potentially hitting double digits.
From a style perspective, the arrival of promising vaccine news in late 2020 saw a rotation of assets towards cyclical stocks, and suddenly ‘value’ was back in vogue. We expect similar rallies to be short-lived in 2021 as low interest rates and economic growth prospects make these rallies unsustainable. As such, we see a modest outperformance for ‘growth’ stocks this year.
In 2020 we saw considerable evidence of companies acting responsibly, and notably being rewarded for doing so by consumers, their staff and governments. In turn, this drove higher valuations and/or increased profits for these companies, and better returns for those invested in them. We expect this megatrend to continue at an even faster pace in 2021 and beyond. We discuss this further in the Investment Themes section of the full publication.
Of course significant risks still reside in 2021. The U.S. political landscape and potential for further civil unrest, complications in bringing the pandemic to rest, and trade tensions between Australia and China are the most acute at present. One should not discount natural disasters or geopolitical conflict elsewhere either. Despite this, we believe risks are skewed to the upside as 2021 commences with markets to be propelled higher by profit growth and low interest rates. Following the calamitous events of 2020, we see some optimism in 2021.
Read ANZ chief investment office’s full 2021 Global Market Outlook (PDF 3.8MB).
A simplified Chinese version can be read here (PDF 1.5MB).