2021 Global Market Outlook: The Old Normal

Economic views

  • Once a vaccine is widely available and lockdowns have been eased, we believe that normal early-cycle recovery dynamics should resume, with a rotation toward relatively cheaper value and non-U.S. stocks that are likely to benefit from a return to more normal economic activity.
  • The most notable damage from the pandemic has been the rise in government debt. However, we think it’s unlikely that governments will start to trim deficits through tax hikes and lower spending anytime soon.
  • In the U.S., we believe that the post-vaccine recovery period will lead to real GDP growth in excess of 5% in 2021.  
  • We believe Europe’s exposure to financials and cyclically sensitive sectors gives it potential to outperform in the post-vaccine phase of the recovery when economic activity picks up and yield curves steepen. 
  • Major central banks have made it clear that they will wait until after inflation rises before raising rates. We think a slow-acting Fed should limit the rise in the 10-year U.S. Treasury yield to between 1.1% to 1.4%—compared to its current level of 0.85% in early December.

Asset class views

Equities: Preference for non-U.S. equities
We prefer non-U.S. equities to U.S. equities. The post-vaccine economic recovery should favor undervalued cyclical value stocks over expensive technology and growth stocks. Relative to the U.S., the rest of the world is overweight cyclical value stocks.

We like the value in emerging markets (EM) equities. China’s early exit from the lockdown and stimulus measures will likely benefit EM more broadly, as should the recovery in global demand and a weaker U.S. dollar.

Fixed income: Bonds universally expensive
We see government bonds as universally expensive. Low inflation and dovish central banks should limit the rise in bond yields during the recovery. U.S. inflation-linked bonds offer good value with break-even inflation rates well below the Fed’s targeted rate of inflation. We view high-yield and investment-grade credit as slightly expensive on a spread basis but believe they have an attractive post-vaccine cycle outlook.

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Disclosures

The views in this Global Market Outlook report are subject to change at any time based upon market or other conditions and are current as of December 7, 2020. While all material is ...

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