2020 has been a year like no other in living memory, and 2021 may prove to be as uncertain. Fidelity International’s Global Chief Investment Officer, Andrew McCaffery, outlines the emerging themes that will drive the new reality and why he’s balancing the market’s recent optimism with caution as we move into the year ahead
Vaccines draw closer, but the economic damage inflicted by the virus is becoming clearer. As this economic reality sets in, investors may start to question whether the policy response is adequate or has overshot, risking higher inflation than desired. If ever there was a time to be nimble and genuinely diversified across regions and asset classes, 2021 is likely to prove the value of this approach.
In 2020, investors consistently chose to believe the best-case scenario, buoyed by liquidity from the Fed and other major central banks. I am concerned that this optimism will not always be matched by the economic reality of 2021. A huge amount of investment has been brought forward to sustain shuttered economies and, given the likelihood of a divided US Congress, a limited fiscal stimulus package could mean a slower recovery. There is a risk in the near term of a double-dip recession in the US if more restrictions are imposed to tackle the virus while the world waits for vaccines to be delivered across populations.
Valuations of some US mega caps appear to be detached from reality, with some stocks trading at over 100 times their earnings. Unless earnings meet current expectations in 2020 and 2021, these stocks remain vulnerable. Any correction could have an outsized impact on the wider market, given the tech giants now account for over a fifth of the index.
Scratch beneath the surface, however, and there are a range of possibilities where valuations have diverged due to the pandemic and longer-term trends. Depending on the virus’s evolution, a vaccine and any policy response, there may be sharp rotations from non-cyclicals to cyclicals or vice versa, though banks and oil companies will remain under structural pressure.
Limits to fiscal stimulus appear so far to have reduced the risk of higher inflation. But the current disinflationary outlook could change rapidly if the velocity of money rises, there are shortages in the real economy, or there is better than expected growth, perhaps triggered by the swift rollout of vaccines.”“In the medium term, we expect US dollar weakness to continue while the Fed remains accommodative. This will be positive for non- US markets, especially Asia.
Climate change looks set to be a priority
After a year in which social factors featured highly on government and corporate agendas, climate change looks set to be the sustainability priority in 2021, fortified by the EU’s Green Deal and by US President-Elect Joe Biden’s evident support. Expectations are high about what could be achieved to speed up decarbonisation at the UN climate change summit in late 2021.
In 2020, we saw how companies that took environmental, social and governance issues seriously going into the crisis, outperformed those that didn’t, both during periods of market volatility and relative calm. The more that firms do the right thing, the more they attract stable capital flows, which leads to better outcomes for the company, for investors, and for society.
These extracts were taken from Fidelity International’s annual outlook, looking at all major asset classes. You can read the full report here.
