While 2021 outlook is constructive by many indications, Purpose CIO asserts investors must stay disciplined
Even as the world continues to endure lockdowns and still-surging coronavirus cases, financial markets have shown sustained strength since the violent downturn in March last year. 2020 ended on a high note across many asset classes, prompting economist David Rosenberg to declare that a “financial bubble of epic proportions” is being pumped up.
For his part, Greg Taylor, chief investment officer at Purpose Investments, is adopting a less apocalyptic view, but not one without a dose of pessimism.
“One prediction that will have to materialize if markets are really to have a positive year is the long-awaited rotation from growth to value (or cyclicals),” Taylor wrote in a commentary published early this month.
Over the last few months, he noted, large tech stocks led a bounce in equity markets as they proved almost presciently suited to the pandemic world order. The inhospitable COVID-19 environment also led to an accelerated evolution as consumer and business trends projected to play out over 10 years were implemented more rapidly.
But November marked a strong start for the reopening trade, which involves seeing banks, transport, materials, and energy materials getting in on the action. “Many of these groups have seen great gains in the last few months but are still well off their highs,” Taylor said.
He also pointed to other bullish predictions for 2021, which to the cynical reader might seem like warmed-over declarations from the start of 2020. An upward creep in bond yields is supporting expectations that they’ll approach 1.5% to 2% by year’s end. GDP is expected to see a growth rebound as the global economy shakes out of recession lows. Stocks are expected to rise by 10% as earnings growth re-enters the stage.
“But predictions are just that,” Taylor said.
Noting that the world is far from what would be considered normal times, he said the aftereffects of the pandemic will linger for a long time. As government spending inevitably slows down and central banks shift to neutral, the world will have to start the gruelling work of economic rehabilitation. The confusing mix of news and sentiment, he said, must be met with judiciousness.
“Time in the market is better than timing the market,” he said, noting that volatility will likely extend its welcome well into 2021. “To wit, if an investor missed the best five days of 2020 on the S&P 500, they would have returned -21% rather than the 16% gain it ended with.”
On the fixed-income front, he said near-zero rates and the start of a global reopening are strong cues for a renewed conviction in rising yields, a scenario under which investors will want to have shorter duration. “We also believe active management is crucial to taking advantage of pricing dislocations,” he said, adding that areas such as high-yield, credit, and investment-grade fixed income still offer plenty of opportunities to earn an attractive yield.
“And lastly, we need to stay focused,” he said. “Given the speed and magnitude of the market bounce following vaccine trials, the biggest risk is that markets have priced in too much good news. Signs that the reopening will not go as smoothly or timely as hoped could be a negative surprise.”
