Outlook for 2021

Economic activity: Upturn in sight

Unexpected and exceptionally severe: 2020 – the year of the coronavirus – brought the deepest economic collapse in contemporary history as well as a host of other woes. The year 2021 can only, and indeed will, turn out better here. Economic activity looks set to rebound vigorously from spring onward on the back of base effects and pent-up demand effects alone. The consensus estimate for the G8 group of the world’s leading industrial nations projects an economic expansion of around 4% for 2021. However, a lot vitally depends on future developments regarding a vaccine against COVID-19 because many questions here are still unanswered: How much of it will be available for whom, and when? How effective is it (and what are its side effects) over the long term? And who wants to get vaccinated in the first place?

The outlook for the battered service sector particularly depends on how the pandemic evolves going forward. China could once again prove to be the growth engine of the world economy next year. Economic activity in the Middle Kingdom, which has managed the coronavirus crisis much better than the West, looks poised to expand by around 8% in 2021. In the developed economies, policymakers will continue to provide growth support. In the USA, the Democrats and Republicans are likely to reach an agreement on at least a small economic stimulus package in the weeks ahead. Cranking up debt looks set to stay in vogue in Europe as well – Germany’s finance minister and the European Commission even see it this way. Central banks, meanwhile, will continue to play their familiar role of sustaining monetary policy accommodation in post-corona 2021. Inflation is unlikely to pose any obstacles to that. Although it is bound to pick up a bit in spring alongside the recovery in economic growth, central bankers’ 2% inflation target remains out of reach in 2021 (and probably afterward as well).


Geopolitics: What comes after Trump?

There will be a change of leadership in the White House in January, something many have long been yearning for. Afterward, there will definitely be fewer tweets from the Oval Office, but things nonetheless are unlikely to go back to square one under Joe Biden. He will probably adopt a more conciliatory stance toward Europeans and will likely strive to step up cooperation on issues such as defense and environmental protection. But when it comes to trade, Biden, like Trump, is an America Firster, albeit under a different-sounding label. So, trade negotiators on both sides of the Atlantic will probably continue to have their work cut out for them in the future. However, the new US president’s primary focus is likely to be on China, not just on trade matters, but also with regard to technological and military ambitions, for instance.

The mainstream view in policy circles in Washington D.C. is that China poses a major threat, so the cold war between the two economic titans looks destined to continue. The Europeans will likely be inclined to increasingly side with the USA in this conflict. Europe itself, however, isn’t headed toward becoming a (geo)political hotspot in 2021, barring a still possible Brexit mishap. Although there’s a busy election schedule in Europe next year, populist parties have lost public support, in large part due to the coronavirus pandemic. Generous government injections of economic stimulus money should keep populist sentiment tepid for the time being.

Generous government injections of economic stimulus money should keep populist sentiment tepid for the time being.

Equities: Favorable omens

Despite the COVID-19 pandemic, 2020 wasn’t a bad year at all for stockholders in the end. Driven by monetary and fiscal stimulus and by recent positive news flow on the vaccine front, (US) stock markets rallied to new all-time highs in autumn. The majority of analysts, almost by nature, are bullish for 2021 as well. The consensus forecast for the S&P 500 index, for example, envisages approximately a 10% gain for next year. We’re not in the business of making percentage-point projections, but we, too, have a constructive stance on the year ahead for stocks. Corporate earnings have substantial potential to resurge next year in line with economic activity.

There is also still a sustained monetary policy tailwind in place. Although stocks are richly valued in absolute terms, the same goes for almost every other asset class, especially bonds. Stocks remain much more attractive than investment-grade fixed-income securities in particular. Within the equities asset class, we see further recovery and catch-up potential for cheaply valued stocks in cyclical sectors at the start of the new year. In contrast to the brief episode in spring 2020, the rotation into value stocks looks set to last a while longer this time. This should also benefit regions like Europe and Japan. However, we do not expect to see a veritable value-stock revival. Blue-chip growth stocks remain our favorites for the longer term.


Fixed income: On a quest for yield

One has long needed a magnifying glass to find yield on the fixed-income markets, especially in Europe. This is unlikely to change in the new year, and that mainly owes to central banks. Yields at the short end of the curve will be held close to zero by means of ultralow policy interest rates, and the European Central Bank’s bond-buying spree likewise constrains upside potential for long-term market interest rates. Meanwhile, bondholders even in the USA are no longer receiving much compensation for taking on risks, though bonds there haven’t yet become an interest-free risk (like they have in Europe). On both sides of the Atlantic, whoever wants to pocket more interest has to climb higher up the risk ladder.

Bonds from less creditworthy companies in the US high-yield segment are still offering a premium of 4 percentage points over government bond yields at the moment. But bonds are largely unattractive from more than just a return perspective. Their function as a stabilizer in investor portfolios is also increasingly in question. Since long-term bond yields hardly have any room left to move lower, the upside potential for bond prices is constrained in the next upleg, whether it’s sparked by an economic downturn or simply by a bout of hiccups on the equity markets. Bonds will hardly be able to offset the share-price drawdowns in such an event. The bottom line here is that fixed-income securities next year will continue to be more of a necessary evil that should be held as sparingly as possible in portfolios. This makes it all the more important to give consideration to alternative assets.


Financial-market forecasts always entail considerable uncertainty, especially in currency trading, which is occasionally dubbed the “ultimate speculative discipline”.

Alternative assets: Key portfolio components

With a gain of around 20%, gold this year was not just a diversifying portfolio component, but also quite a profitable one even though the yellow precious metal has been in a protracted correction since late summer. Gold appears to have lost some allure lately in the face of vaccine elation, economic optimism and mildly rising real interest rates. But the longer-term drivers of the bull market in gold remain intact. Those drivers include sustained monetary policy accommodation from central banks and the prevailing dearth of decent investment alternatives, which have led to low opportunity costs for holding gold and correspondingly high investor demand for the yellow metal.

Moreover, demand for gold jewelry in the emerging economies of Asia could rebound in 2021. On balance, investors should aim for at least a neutral gold allocation in the new year. To a similar extent, real estate should also be a constituent part of a balanced portfolio. The arguments in favor of “concrete gold” are akin to the rationale for investing in the yellow precious metal. In the face of negative-yielding government bonds and a lack of investment alternatives, real estate funds remain attractive despite their relatively high premiums to net asset value in historical comparison. Hedge funds are also worth considering in the alternative assets class. Even though in the past they have seldom lived up to their reputation of being a source of returns uncorrelated with (equity) markets – judging by the performance of broad hedge fund indices – some individual hedge fund products may nonetheless very well be compelling. But it all depends on picking the right ones – selectivity is the key.


Currencies: Eu(ro)phoria

The US dollar was one of the big losers in the outgoing year. The US dollar index has shed more than 5% of its value year-to-date. The majority of currency analysts are currently in agreement that the greenback will tumble further in 2021. The towering government debt in the USA and the dollar’s weak technical backdrop are indeed uninspiring at the moment. But the picture really doesn’t look much better for the euro either, at least with regard to its underlying fundamentals. The market’s current optimism about the euro is evidenced in part by the big bets that have been placed on futures markets on it continuing to climb higher. But whether that optimism is actually justified remains to be seen in the new year. Financial-market forecasts always entail considerable uncertainty. This especially goes for currency trading, which is occasionally dubbed the “ultimate speculative discipline”, where making the right calls just 55% of the time is already considered a remarkable feat.

We therefore are abstaining from making pinpoint exchange-rate projections, even for the closely watched EUR/USD currency pair. But with somewhat greater conviction we can assert that the Swiss franc looks destined to stay a relatively strong currency in 2021 because its strength during the year of the coronavirus stemmed from more than just weak world economic activity or nervousness on the financial markets. As recent weeks have shown, the franc isn’t a currency that only has legs when markets are in risk-off mode. Switzerland’s large current-account surplus, its comparatively small government debt load and the narrow interest-rate differential make the Swiss franc an attractive currency in both good and bad times, and this is unlikely to change for the time being.


Oliver Hackel, CFA Senior Investment Strategist

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