2021 Equities Outlook: Value’s Time To Shine?

Resetting the cycle: The old normal

For mostly obvious reasons, 2020 was the wildest year in recent memory for the global economy and markets across all asset classes. We saw markets fall and economic activity collapse, only to rebound in the space of months, buoyed by record amounts of monetary and fiscal stimulus. As we begin 2021, the market’s focus has turned to the early stages of the economic recovery and a return to normal. As a result of the COVID-19 impact, the global economy has effectively been reset.

The view of our investment strategy team is that global markets are moving to the old normal. The medium-term outlook for economies and earnings is positive, and the global economy is in the early post-recession recovery phase. Due to the large amount of spare capacity in the system (i.e., elevated levels of unemployment), economies are going to be able to produce low-inflationary growth—which tends to be good for risk markets.

Asset class forecasts – Equities

The reset of the global economy to the early cycle phase, coupled with a backdrop of low inflation and low interest rates, favors equity over bonds. Over the next five years, we expect global equities to return 7.3%, versus a return of -0.1% for global aggregate fixed income.

Within global equities, expected returns vary across different regions over the next five years. U.S. equities, which have outperformed in recent years on the back of high-growth tech heavyweights, are expected to underperform relative to other regional equity markets as valuation spreads normalize. Non-U.S. developed market and emerging market equities, in particular, are expected to have stronger returns. The timing and extent of these return differences is debatable, but we do think U.S. equities will be a relative loser.

The background to this change is that the global economic cycle has reset and, as such, many of the tailwinds behind the outperformance of U.S. equities are expected to recede. Similarly, as the global economic recovery continues, support for cyclical market segments (which have seen years of relative underperformance) should increase and drive relative outperformance of non-U.S. equities over U.S. equities.

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These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.

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