Overall, 2021 is promised to be the year of recovery – this is the consensus of the overwhelming majority of analysts. However, substantial uncertainty remains depending on how successful the vaccine distribution and acceptance will be.

Even though the struggle of production and distribution is yet to be overcome and the anti-pandemic restrictions in many countries are yet to be lifted, global stock markets finished their best month on record in November. In the US, almost a month after the elections, the political turmoil is closer to a resolution now that the incumbent president has agreed to start the transition process - even though at the same time he promised to continue challenging the results of the elections. It is somewhat apparent now that for the next two years the country will be governed by a democratic White House and a mostly republican Senate – the combination which markets also perceived as good news. Markets’ optimism, however, looks a little bit premature considering the recent macroeconomic data.

Tactical Asset Allocation

Macroeconomics

After the spectacular crash in 2020, 2021 is expected to bring a strong recovery in the world. The output, however, will not get back to the pre-pandemic level at least until 2022 in most countries. Moreover, high unemployment levels pose a great challenge to the world.

Overall, the uncertainty remains substantial: the path of recovery largely depends on the pandemic-related developments.

Fixed Income

The markets traded in November in line with the global risk-on sentiment, which was driven by the election result and news of potential vaccines bringing an end to the pandemic.

Although US Treasury 10yr yields shoot up 15 bps to 0.97 on the vaccine news, the full conviction of an economic recovery was missing as the number of new COVID-19 cases increased day by day. It looks like that rates markets want to have the facts for an economic recovery on the table. Currently, they are just slowly adapting to the bullish equity scenario.

A Bloomberg survey shows economists’ forecasts for US 10y yields at 0.91 by the end Q1 2021.

Credit markets behaved differently, much closer to equities. US and European HY spreads tightened around 100 bps, its biggest move since April/May. Currently, markets are trading close to pre COVID-19 levels. Bonds from down beaten sectors like airlines and retail performed best.

Similar behaviour we saw in Emerging Markets but not to the same extend. We like the sector as it still has some potential to perform, especially with the current raise in oil-price.

With an expected vaccine roll out in 1H21, provided support from central banks and fiscal stimulus continues, we expect the hunt for yield to continue with higher beta names outperforming.

Fixed Income

For credit we remain rather positive although spreads narrowed significantly and trade close to their historic lows. The hunt for yield is going to continue with investors forced to go down the credit curve.

An expected economic recovery will favour higher beta names which still have some room to tighten. Auto, Oil, Cyclicals and Consumer Finance are the sectors which have the most potential. Another segment we overweight in our portfolios is hard currency Emerging Markets bonds.

Equities

The outlook for equity markets among investors and analysts can be described as cautiously optimistic. A new economic and interest rate cycle has begun, and the economy is in the early stages of recovery. This is signified by the positive response on the stock markets and a steepening yield curve.

Equity Indicators

In 2021 we expect a valuation adjustment along all asset classes. In case of equities, this should be achieved via improved corporate earnings prospects.

The economic tailwind should boost the sensitive sectors such as basic materials, industrial goods, and consumer discretionary, as well as the smaller and medium-sized tech companies. However, we expect large caps, especially mega-caps in the U.S., to take a breather in 2021 after years of outperformance.

Alternatives

Currencies that are positively dependent on the global economic cycle may benefit in 2021. This applies all to commodity and procyclical currencies. The EUR is also likely to appreciate further due to the trend towards USD weakness, albeit to a somewhat lesser extent than other cyclical currencies.

The future development of gold price is determined by three factors: the trend of the USD, real yields, and inflation expectations. In 2021, we expect it to retest its record high and even slightly exceed it.

In the wake of the economic recovery, commodity prices in general should also have additional upside potential in 2021.

Among hedge funds, we focus on strategies that benefit from vaccine announcements and related shifts in positioning.

Note: This report is published by Clarus Capital Group AG