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Wealth Managers Position For 2021 Rebound
Tom Burroughes
8 December 2020
As is customary around this time of year, the world’s major wealth and asset management houses try and figure out what the coming 12 months will mean for investors, even if that means avoiding the hubris of predicting specific markets, for example. After an extraordinary year such as 2020, some people might be tempted to avoid the whole exercise. But some scenario planning, review of risk management and wealth goals are certainly worthy goals. The US and Europe face challenges in the very near term: A resurgence of virus cases may result in outright economic contraction. Risks of policy fatigue are rising, especially in the US, and ongoing policy support is vital to limit any permanent economic scarring. Yet positive vaccine news is a game changer in that we now know that we are building a bridge to somewhere, providing clarity for policymakers, companies and markets about getting to a post-COVID-19 stage. portfolio managers, Grant Bowers and Matthew Moberg
The air is full of terms such as “new investment order,” “new normal,” “accelerating digitalization” and so forth. There is understandable weariness about these expressions and as older readers might reflect, there is often little that is truly new under the sun. (The editor of this news service is particularly allergic to “build back better”). There is no doubt, though, that a desire to boost economic growth, foster those entrepreneurial “animal spirits,” maintain health and protect the planet will be strong themes in the months and years ahead.
Here is a selection of what firms are saying:
We see stronger growth and lower real yields ahead as the restart accelerates and central banks limit the rise of nominal yields - even as inflation expectations climb. Inflation will have different implications than in the past. Strategic implication: We are underweight government bonds and see equities supported by falling real rates.
COVID-19 has accelerated geopolitical transformations such as a bi-polar US-China world order and a remaking of global supply chains - placing greater weight on resilience and less on efficiency. Strategic implication: We favor deliberate country diversification and above-benchmark China exposures.
The pandemic has added fuel to pre-existing structural trends such as an increased focus on sustainability, rising inequality, and the dominance of e-commerce at the expense of traditional retail. Strategic implication: We prefer sustainable assets amid a growing societal preference for sustainability.
The traditional business cycle playbook does not apply to the pandemic. We see the shock as more akin to that of a large-scale natural disaster followed by swift economic restart. Early in the crisis, we assessed that the ultimate cumulative economic losses - what matters most for financial markets - would likely prove to be a fraction of those seen in the wake of the global financial crisis (GFC).
This view was conditional on robust policy support to tide households and businesses through the income shock. The early results of COVID-19 vaccine trials give us greater confidence in this framework. They suggest that the economic restart can re-accelerate significantly in 2021 as pent-up demand is unleashed. Markets will likely be quick to price in a full economic restart given the better visibility on the outlook.
We believe that declining rates of infection and progress toward development and distribution of a vaccine will determine the pace of US economic recovery and, in turn, spur economic growth in 2021. The world is waking up to the Fourth Industrial Revolution, a time of massive change led by innovation, which the impact of the COVID-19 virus has accelerated. Examples of rapid industry shifts include work from anywhere, remote sports and entertainment, greater reliance on restaurant takeout and delivery services, increasing industry consolidations, supply chains returning domestically, and retailers moving exclusively online.
The accelerated adoption of technological solutions during the pandemic is just the beginning, in our view. As we emerge from the pandemic crisis, we believe that the continued shift to digital solutions will be more important than ever and may continue to accelerate as latecomers catch up, while employees and consumers retain at least some (if not most) new behaviours that have become necessary in the age of global social distancing.
Going forward, we see drivers of value creation across all industries, such as healthcare, fintech, consumer retail and manufacturing. Leaders on the forefront of these trends are proving that they understand the state of their businesses and can meet their customers’ needs faster than ever, leading the way in highly dynamic business environments. In the shorter term, we will be listening to what companies have learned from their operations under the pandemic, and how they might apply that to their businesses over the longer term.
We remain focused on finding quality companies with strong competitive advantages, robust balance sheets and healthy free cash flows that can weather a severe economic downturn or increased market and economic volatility. Many of these high quality companies should be able to emerge from a crisis even stronger, in our view. We encourage investors to think long term and consider volatility as an opportunity to take advantage of good prices on great companies that stand to benefit from significant secular growth trends.
Alex Tedder, head and chief investment officer of global and US equities at
The US Federal Reserve’s aggressive response to the coronavirus pandemic has driven yields on safe-haven debt to near zero, leaving “low-risk” portfolios increasingly susceptible to interest rate-driven price volatility. We believe that the Fed’s accommodative stance will persist for many years, which may prevent yields from rising materially. However, this doesn’t ensure that they will fall either, and the risk appears asymmetric given that low yields fail to protect against even modestly higher rates.