19 November 2020
Welcome to “Outlook 2021”, our annual investment outlook update from Barclays Private Bank (which you can also download as a PDF [PDF, 3.8MB].
This has been a tumultuous year. One that has seen the fastest gross domestic product contraction and paciest bull-to-bear equity descent, then ascent, since World War Two.
While volatility may be less elevated next year, financial markets and the economy could remain at the mercy of COVID-19 developments, especially on a fast vaccine rollout.
The main question is over the pace of recovery. We expect a growth rate of close to 5% in 2021. That said, some areas of the economic landscape may change dramatically. High government debt levels are a legacy to manage carefully and inflation is a risk to monitor.
Turning to financial markets, in a world characterised by record low rates and high equity valuations, the five-year expected total returns on equities and bonds are likely to be lower than previously. Following the firepower unleashed by leading central banks this year, rates fell further into negative territory, weighing on prospective bond returns. European and US high yield bonds, on a very selective basis and in the most resilient part of the market, may be worth considering, alongside US inflation-linked bonds, to hedge positive inflation surprises.
And in equities, coronavirus is shuffling the cards, accelerating structural trends. The rise of technology companies, aided by home working and online retail sales, reflects the attractions of growth. While valuations may deter some, equities seem fairly valued in the context of low rates. We are constructive on prospects for the asset class, preferring high-quality companies and an active approach.
From a portfolio perspective, the pandemic showed the limitations of only relying on equities and government bonds. We see value in adding alternative assets such as private markets, gold or hedge funds to a portfolio to diversify and improve its risk-return profile.
Another area of interest is sustainability, as pandemic recovery plans from governments have a sustainable bias. Companies too are being drawn to opportunities available, and potential growth prospects, from transitioning to a low-carbon world. Similarly, including environmental, social and governance (ESG) considerations in asset selection can boost returns. The momentum behind investing sustainably, and with ESG considerations, suggests that increasingly investors agree.
Jean-Damien Marie and Andre Portelli
Co-heads of investments, Private Bank
The size and scope of interventions by the authorities to counter the effects of coronavirus and move to working from home are two examples of the impact the pandemic is having. Just how much might the virus, and the recovery from it, refashion the world and what could this mean for investors?
The pandemic looks like changing the economy in many ways. After suffering the deepest downturn since the Great Depression in 2020, is the US economy set to accelerate its bounce back? Much is likely to depend on the ability of authorities to tame the virus and enact additional fiscal stimulus.
The emergence of COVID-19 across the continent this year triggered a recession and soaring unemployment levels. Demand looks set to be weakened for some time. But, with politicians launching a European recovery fund directed towards a more sustainable economy and the central bank upping bond purchases, can the region deliver a greener recovery?
China may have been the first hotspot for the coronavirus outbreak. But, its aggressive response limited the impact and helped the economy seemingly bounce back to remarkable health. As the country eyes becoming the world’s largest economy, is it on the way to a becoming a high-tech, domestic consumption-led powerhouse?
The COVID-19 pandemic has usurped Brexit as the key influence of prospects for the UK. While output may have sunk sharply this year, can the economy bounce back in 2021 with much of the country in lockdown again and no trade deal with the EU yet?
Amid COVID-19, the outlook for the world, and investment returns, looks like being radically different. Investors may have to adapt strategies in planning for lower long-term growth and returns. At a time of heightened uncertainty, we look to help investors prepare for such a world from a behavioural perspective.
While equity valuations may seem elevated, they appear justified in a low-rate world. With growth companies, such as tech and healthcare, in demand, the US remains an attractive market. However, returns may disappoint in the short term. With many industries being shaken up by the pandemic’s effects, a bias to high-quality companies in actively managed portfolios seems attractive.
Is an era of higher yields about to return, as the US Federal Reserve leads other leading central banks to cut ultra-low rates amid the pandemic? In the meantime, how might investors position portfolios in such times?
Producing desired returns in a low-return world with traditional equity-bond allocations can be challenging. In searching for a diversified, uncorrelated asset mix, alternatives may be an answer. Is it time to up positions in hedge funds and private markets?
Article for Indian clients only
In an article aimed at our clients in India, the pandemic looks like clouding prospects for Indian assets next year much like this. Positioning portfolios for the anticipated effects of COVID-19 can be tough. But quality, sustainable businesses offering the prospect of earnings growth seem attractive in a world being reshaped by the effects of the virus.
With returns from traditional approaches looking challenging in the short term, it may be time to concentrate on longer term options. With renewed focus on climate change likely from governments and companies in 2021, might investing sustainably offer attractive growth opportunities while protecting the planet?
Facing a tough macroeconomic outlook, holding a portfolio of high-quality companies may offer an attractive long-term strategy. But how best to invest in them? Considering environmental, social and governance factors in investment decisions may be one route. How might taking such as approach improve asset selection and prospective returns?
In the era of COVID-19 the outlook for the world, and investment returns, looks like being radically different than previously. For one, prospects for asset returns may disappoint. At a time of much uncertainty, how can investors avoid letting their emotions get in the way of long-term investment decisions?
Expected returns on traditional assets look like disappointing. In such periods, investing can be far from easy, especially when emotions affect investment decisions. A particularly volatile period in an uncertain, post-pandemic world may create potential market dislocations. This could provide opportunities for well-disciplined, active investors with well-diversified portfolios.
From leading central bank meetings, German and Dutch general elections, the US presidential inauguration and much else aside, find out key dates facing financial markets in 2021.
All the articles published in Outlook 2021 are available to download here as a PDF:
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