Active is: Anticipating what’s ahead
2021 outlook: portfolios need a broader mix as the pandemic prolongs the uncertainty
Summary
While investors can approach 2021 with optimism that an effective Covid-19 vaccine will be available, the path of the economic recovery remains unclear. A broader toolkit of investments is needed – not just the regions, sectors and strategies that have recently done well.
Active is: Challenging convention
Brexit done, Covid continues: what’s next for the UK?
Summary
The UK market has been deeply out of favour for some time now. The agreement of a UK-EU trade deal marks an essential step towards making the UK “investable” again but several other factors – not least the ongoing Covid-19 pandemic – will continue to weigh on sentiment.
Key takeaways
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Explore our view on what 2021 has in store
While investors can approach 2021 with optimism that an effective Covid-19 vaccine will be available, the path of the economic recovery remains unclear. A broader toolkit of investments is needed – not just the regions, sectors and strategies that have recently done well.
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Financial repression “reloaded” and massive government debt could drive up long-term yields
Given the support that central banks pledged in the face of Covid-19, we expect short-term interest rates to remain at ultra-low levels for the foreseeable future. This is essentially a “reloading” of the financial-repression policies (including low interest rates, restricted capital flows and other regulations) that central banks implemented after the financial crisis to help their economies grow their way out of debt. In our view, continued intervention by central banks is necessary, but it could still lead to higher inflation and other problems in the medium to longer term. In addition, a huge supply of sovereign bonds – the direct consequence of extremely expansionary fiscal policy – will continue to flood the bond markets in the coming quarters.
What does it mean for investors?
Equities could benefit from positive news about the coronavirus – but balance and selection are key
Amid the upheaval of the Covid-19 pandemic and accompanying lockdowns, certain regions and asset classes did quite well – particularly US large-cap technology and online retail names that benefited from the “stay-at-home” trend. Positive developments in the fight against the coronavirus could help a broader range of stocks and regions in addition to these “coronavirus winners”.
One such positive development was the announcement of promising vaccine trials towards the end of 2020. Yet it remains unclear how long it will take to roll out these vaccines and how many people will be willing to get them. Until then, many regions will likely grapple with subsequent waves of coronavirus infections. So as we wait for effective vaccines and therapeutic treatments to be broadly adopted, the growth outlook will be unclear and private-sector spending (including private consumption and investments) could be suppressed.
If cyclical economic data lose momentum, equities could suffer – particularly if the markets see a disconnect between asset prices and the underlying health of the economy.
What does it mean for investors?
Exhibit 3: the value investing style is at an extreme discount to growth
Relative valuation of MSCI World Value/Growth (1985-2020)
Source: Refinitiv Datastream, Allianz Global Investors. Data as at October 2020.
The US dollar seems more likely to weaken, which would benefit non-US markets
As the global economic rebound ramped up, the US dollar fell in value relative to other currencies (see Exhibit 4). While some economists see a turnaround on the horizon – in large part because uncertainty about Covid-19 is supportive for “safe-haven” assets such as the US dollar – we are slightly more inclined to believe the dollar will fall for several reasons:
What does it mean for investors?
Exhibit 4: the US dollar dropped in 2020 as the global economy recovered
US dollar trade-weighted index (2015-2020)
Source: Bloomberg, Allianz Global Investors. Data as at October 2020.
Sustainable investing provides the long-term view investors need
The coronavirus pandemic exposed shared vulnerabilities in the global economy and the systems on which we all rely. Investors will increasingly need to find ways to be selective among sectors and individual names, rather than rely on broad market performance. Environmental, social and governance (ESG) factors can be a helpful lens for highlighting major global risks and testing the resilience of businesses and systems.
The Covid-19 pandemic also forced many investors to hit the “reset” button and recalibrate their priorities, with policymakers, regulators and investors examining the social effects of economic activity. A growing number of investors will want to put their capital to work in a sustainable way, and they’ll be looking for creative ideas to help achieve meaningful real-life change on topics such as climate change.
This may happen within the framework of the 17 UN Sustainable Development Goals (SDGs), which call for greater cooperation between countries, organisations, companies and individuals to address vital development issues. A 2017 UN report put the SDG funding gap in developing countries at around USD 2.5 trillion per year, making it critical to find innovative and scalable new investment products for the countries and sectors most deprived of funding. This can take the form of public/private partnerships, with parties with similar goals shouldering different responsibilities. The field of development finance – which uses capital and know-how from public and philanthropic sources to mobilise private investment into sustainable development – can play a crucial role here.
For example, given that massive spending is still needed to return parts of the economy to its pre-pandemic growth trajectory, some governments see an opportunity to rejuvenate existing infrastructure such as electricity networks. This can be done while building the social, environmental and clean-energy projects that will support the well-being and prosperity of future generations.
But sustainable investing is not just about doing good – it also helps investors seek solid performance. As Exhibit 5 shows, approximately two-thirds of active ESG managers in the eVestment database (which tracks institutional asset managers) have beaten the benchmark index for global equities during the last three years. This includes 2020 – an extremely volatile period for equities.
Exhibit 5: the majority of active global ESG managers have beaten the benchmark global equity index over the last 3 years
Percentage of active managers in eVestment Global Equity ESG database that outperformed the MSCI All Country World Index (through 3Q 2020)
Source: eVestment. Data as at September 2020. The bars represent the % of active managers in the eVestment Global ESG database outperforming the MSCI ACWI Index in each period.
What does it mean for investors?
There are many options for investors who want to put their money to work in a sustainable way – particularly as the world recovers from the Covid-19 pandemic.