Investment Themes for 2021

Recently we have started to see vaccines begin to be rolled out around the world amid more stricter lockdowns while in Australia we have seen the States use stricter border controls while vaccines are yet to be distributed.

In addition to the pandemic there have been political developments with the Democrats taking control of the Senate in the US that indicates more fiscal stimulus is likely on the way.

I wanted to share how these developments will likely impact the investing landscape and investment themes to consider.

A research report from T. Rowe Price discusses five investment themes for 2021:

  • Post pandemic road to recovery
  • Politics and the pandemic
  • Policy and low yields
  • Parting styles amid disruption
  • Price safety

Post-Pandemic Road to Recovery

The article discusses how the virus is impacting markets in various ways. They expect the economy to recover but it will not be a smooth recovery until vaccines are rolled out. The second way they state the virus is impacting the economy is by policymakers doing whatever it takes to stimulate the economy, however consumers and corporations may still be wary if the economic hardship lingers and the pandemic gets worse before it gets better.

T. Rowe Price investment ideas for this theme are:

  1. Include both defensive (e.g long duration government or high quality corporate bonds) and growth assets (e.g equities, high yield bonds and emerging market debt) in portfolios to benefit from any upsides and also protect against downsides.
  2. Include procyclical assets (e.g. smaller companies and credit markets) in portfolios as they tend to outperform during economic recoveries and they have also not rallied as hard as some other assets in 2020 making their valuations look attractive.

Politics and the Pandemic

The article notes how geopolitical tensions around the world are rising and the virus has accelerated some structural changes including rising inequality, more social unrest, expanding populism, increased protectionism and the rise of China.

The investment ideas for this theme that T. Rowe Price discuss are:

  1. Focus on assets in local markets with lower sensitivity to global turmoil, currency movements and changes to global business models and supply chains (e.g. smaller companies and US companies that generate most of their business within their own local markets).
  2. Diversify and invest globally to reduce the risk of a major geopolitical event affecting the domestic market (e.g. currency hedged global equities and fixed income).
  3. Invest in emerging markets mostly China and Asia (eg. Chinese and Asian (excluding Japan) equities and credit).

Policy and Low Yields

The authors indicate they believe that fiscal stimulus and expansion of public deficits will continue for the next decade and as a result consumers in developed economies will benefit from lower rates. Quantitative easing will continue as required, leaving government no other feasible option but to continue to borrow and spend. The economic downturn caused by the pandemic will keep rates low and while there may be increases from 2020 lows, any increases will be minor due to weak economic growth and low inflation. Increased demand for government bonds by institutional investors is also keeping rates low. They also expect only a slight increase in inflation over the next year.

T. Rowe Price’s investment ideas for this theme are:

  1. Invest in higher risk assets (global equities and global high yield bonds) that generate higher returns as while they are more risky they will continue to receive support from central banks which will act as a floor for markets.
  2. For income seeking investors also look at high yield debt and also consider emerging market debt (both government and high quality corporates) which will benefit from continued US dollar weakness.
  3. Invest in assets that will benefit for fiscal spending (e.g. infrastructure, green energy and ESG strategies).

Parting Styles Amid Disruption

The article explains that some sectors and economies and markets will do better than others which creates both threats and opportunities.

The authors’ investment ideas for this theme are:

  1. Maintain a balance in portfolios between various investments styles (e.g. growth and value, large and small companies) and tilt towards winners during their cycles of outperformance.
  2. Invest in investments that offer lasting growth despite the pandemic (e.g ecommerce and technology, health care and large US companies).
  3. Balance winners with neglected sectors that are poised for recovery (e.g. financials, European equities and large US value companies).

Price Safety

The article mentions how high levels of stimulus have inflated the prices of traditional conservative assets (eg developed market government bonds especially Europe and Japan) and forcing their yields low making them relatively expensive and not as effective as income generators for investors as they used to be so safety has become pricey.

T. Rowe Price’s investment ideas for this them are:

  1. Invest in bond strategies that use relative value techniques to reduce risk.
  2. Use strategies that use derivatives to reduce tail risk.

Conclusion

We still remain optimistic on markets over 2021 as governments and central banks are likely to keep their foot on the pedal until vaccines are widely rolled out and economy recover is in full swing. We still however expect periods of volatility due to geopolitical tensions and continued lockdowns until the pandemic is brought under control hence the need for both defensive and growth assets in portfolios.

From an investment portfolio perspective, we invest with fund managers or in direct equities that take advantage of these themes.


If you wish to discuss any concerns about the current market or about any strategies to do with your financial plans, do not hesitate to call your Financial Adviser.


Disclaimer: This publication has been compiled by Financial Decisions (AFSL/ACL Number 341678). Past performance is not a reliable indicator of future performance. While every effort has been taken to ensure that the assumptions on which the outlooks given in this publication are based on reasonable data, the outlooks may be based on incorrect assumptions or may not take into account known or unknown risk and uncertainties. Material contained in this publication is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such. The information and any advice in this publication do not take into account your personal objectives, financial situation or needs. Therefore you should consider its appropriateness having regard to these factors before acting on it. While the information contained in this publication is based on information obtained from sources believed to be reliable, it has not been independently verified. To the maximum extent permitted by law: (a) no guarantee, representation or warranty is given that any information or advice in this publication is complete, accurate, up-to-date or fit for any purpose; and (b) Financial Decisions nor its employees are in any way liable to you (including for negligence) in respect of any reliance upon such information or advice. February 2021

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