02 Feb 2021
Karen Ward, Chief Market Strategist, previews this quarter’s themes and invites you to use the Guide to help navigate the investment landscape.
In the very near term, activity is likely to remain weak as restrictions remain necessary to contain the spread of Covid-19 (Guide to the Markets – UK pg 13). But vaccines are now being rolled out in many parts of the developed world and by mid-year we should be getting back to some degree of normality. At this point, we should see a meaningful acceleration in activity as the savings that have been accumulated – helped by the enormous fiscal stimulus (pg 25) – get unleashed. The fiscal and monetary coordination (pg 9) deployed in most regions has proved highly successful in providing a bridge over troubled waters. The downside to this stimulus is the extraordinary amount of debt that governments have accumulated (pg 8). Interest rates will have to stay low for a very long period of time to ease the burden of this debt and prevent it from dampening the recovery (pg 21).
After the recent rally, it may seem that markets have already priced in a strong bounce back in activity. But it’s worth remembering the extraordinary sector dispersion created in this recession (pg 67). Global energy stocks are still well down on their pre-Covid levels, for example. As the year progresses and confidence in the recovery increases, we could see a number of sector/style and regional rotations.
Given the prospect of a prolonged period of low returns in fixed income, it will be more important than ever to identify secular growth themes. In our view, many of these opportunities can be found in the Asian equity and fixed income markets. The effectiveness of China’s internal and external controls helped it overcome the virus back in the spring, and activity is already back to the pre-Covid trend (pg 4). The structural foundations are similarly appealing, with the prospect of rising middle classes in the likes of China and India (pg 47).
Another secular theme we think investors need to be increasingly mindful of is the growing momentum to tackle climate change. Indeed, this quarter we have introduced a new sustainable investing section of the Guide. Massive change in policy and regulation will be required in the coming years for governments to meet the emissions targets they have set themselves (pg 87). Investors need to be aware of how initiatives such as carbon pricing (pg 88) may affect the value of assets in their portfolio. Climate tech – companies that will be part of the solution to tackling climate change – also offers secular growth opportunities.