2021 OUTLOOK GLOBAL ASSET ALLOCATION - By Candice Bangsund, Vice President and Portfolio Manager, Fiera Capital
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GLOBAL ASSET
ALLOCATION
2021 OUTLOOK
By Candice Bangsund, Vice President and Portfolio Manager,
Global Asset Allocation
LOOKING AHEAD TO A BRIGHTER 2021
The global economy continues to heal and has stabilized at reasonably healthy levels, with the sheer
abundance of monetary and fiscal stimulus acting as a critical source of support even as the coronavirus
continues to circulate across the globe.
Economic gains have been driven by the factory sector that has governments reinstated more stringent lockdowns in response to
demonstrated a growing resilience to the pandemic, thanks to the the second, record-breaking wave of infections across Europe and
synchronous recovery in global demand and trade flows. Factory the U.K. The deterioration has been concentrated in services that
strength has counteracted a more tepid revival in the services have been hit disproportionately by new curbs that have been
sector that’s been plagued by the latest spike in Covid cases and targeted towards leisure, restaurants, and hospitality. Indeed, the
the flood of new restrictions that have been aimed at the high- European economy is more closely tied to services and tourism
touch services space. versus the United States.
While it goes without saying that the latest virus trends are
worrisome, there are reasons for optimism. The unrelenting
backstop from both central banks and governments has been
and will continue to be instrumental in guiding the economy
back to health. Moreover, the end of the pandemic is now in
sight. In November, three vaccine candidates revealed positive
results in clinical trials and inoculations began in December. While
widespread distribution and vaccination will take some time, there
now appears to be a light at the end of the tunnel.
As such, while the recovery may be restrained in the near-
term, it won’t be derailed and a profound economic revival is
almost certain to unfold next year. As populations get inoculated
and large parts of the global economy reopen, the powerful
revitalization in consumer and business confidence should unleash
massive amounts of pent-up demand and set the stage for an
Economic gains have been impressive rebound in activity in the latter part of 2021.
driven by the factory sector that
has demonstrated a growing Encouraging vaccine
resilience to the pandemic developments should set
the stage for a swift return
Regionally speaking, solid recoveries across the U.S. and China
have overshadowed some vulnerabilities in Europe. The Chinese
to normalcy and a rapid
economy continues to be a key pillar of strength, cementing the recovery in 2021
nation’s status as the only major economy set to grow in 2020.
Economic gains are all-encompassing across both the factory and
consumer space, while forward-looking business surveys imply
that strength is likely to extend into 2021. This vigorous landscape
in China remains an important tailwind for the global trajectory in
the coming year. Meanwhile, the U.S. economy has held firm even
in the face of soaring infections, with relative strength reflecting
the lagged impacts of massive fiscal stimulus. The consumer
remains a dominant driving force, with job gains and elevated
savings cushioning the blow from fading fiscal stimulus - while
factory and housing activity are also bright spots. In contrast, the
European economy hit a soft patch in the fourth quarter after
2021 Outlook 2IMPROVED MACROECONOMIC VISIBILITY
While sentiment could prove vulnerable as investors digest to be market-friendly, which has raised the likelihood that further
headlines on the global Covid front, the cyclical outlook remains fiscal aid will be approved early in the new year (if not before).
favorable given our expectation for a swift return to normalcy in Consequently, any near-term hit to growth should prove short-
2021. Importantly, several lingering headwinds are set to recede as lived. Regarding the coronavirus, the sharp acceleration in new cases
we head into the new year. is unlikely to persist as both people and governments respond and
On the political front, uncertainty is bound to dissipate. All signs curves inevitably flatten. Finally, progress continues on the vaccine
are pointing towards a smooth transition of power to the Biden front and it appears increasingly likely that a good portion of the
administration in January, with a more predictable and amicable global population will be vaccinated by the end of 2021.
approach to global trade relations. Meanwhile, expectations Given that macroeconomic visibility is set to improve
are calling for a divided Congress, so the prospect for unfriendly markedly heading into the new year, investor focus is likely to
legislation such as higher corporate taxes are likely off the table. revert back to the lucrative backdrop of strong, above-trend
Regardless of the election outcome, fiscal spending plans will be put growth and ample liquidity conditions, which should
in place. President-elect Joe Biden’s cabinet appointments appear pave the way for further stock market gains through 2021.
INVESTMENT STRATEGY:
REFLATIONARY TRADE INTACT
> Taken together, the pace of economic activity is improving, bond yields are forming a bottom, inflation
expectations are on the rise, the US dollar is weakening, and commodity prices are pushing higher. In this
reflationary environment, it is likely that equities will make new highs.
> As a result, we enter the new year with an overweight allocation to equities, with a preference for the cyclically-
biased, value oriented corners of the market where there’s still a compelling valuation proposition, in our view.
After the narrow, growth (tech)-dominated upswing through most of 2020, we expect market gains to broaden-
out in 2021 as the prospect for more visible growth sparks a rotation towards the underappreciated sectors of the
market such as financials, industrials, and resources. As these sectors have a larger representation outside of the
US, we expect more upside in markets that contain a higher cyclical exposure, such as the Canadian equity market.
> In contrast, we see little value in core fixed income given the low starting point for interest rates. We expect yield
curves to steepen in a bond-bearish fashion. Policymakers will keep rates anchored at the short-end of the curve,
while our expectation for a stronger economy and the corresponding rise in inflation expectations should place
some upward pressure on the long end of the curve. Moreover, the Federal Reserve’s newly-announced monetary
policy framework suggests that the path of least resistance for longer-term bond yields should be biased higher,
with the increased tolerance for higher inflation ultimately placing some modest upward pressure on the
long-end. Bond investors could find themselves in a vulnerable position with yields at these depressed levels,
increasing the risk of capital loss.
2021 Outlook 3CURRENCY & COMMODITY OUTLOOK
OIL
Our expectation for a rapid revival in global growth should
reignite demand and help to alleviate the massive glut in the
US DOLLAR
oversupplied market. At the same time, ongoing discipline from
The path of least resistance for the greenback remains lower, OPEC and its allies in keeping output restrained should help
in our view. The countercyclical nature of the US dollar implies markets to find a better balance and place a floor under prices in
underperformance as the global economy continues to the coming year.
normalize, risk aversion ebbs, and the reflationary trade gains
further traction in 2021, as we expect. COPPER
Considered a barometer for global growth, copper should thrive in
the environment of stronger, China-led global growth prospects,
while soft dollar conditions and a tightening supply backdrop
should also bolster prices. The healthy rebound in global factory
activity also points towards robust demand for the industrial
CANADIAN DOLLAR
metal in the next 12 months.
The secular downtrend in the US dollar should ultimately prop
up the Canadian dollar, while our expectation for a swift global GOLD
economic acceleration and corresponding strength across the
While gold could be prone to some periodic setbacks as the
commodity complex should be key tailwinds for the loonie
economy regains its footing and haven demand recedes, the
over the next 12 to 18 months.
bullish narrative remains intact. The Federal Reserve’s increased
tolerance for higher inflation and an extended period of rock-
bottom policy rates will keep real yields pinned lower, while a
structurally weaker dollar and bullion’s appeal as a geopolitical
and inflation hedge should also lend some support.
RISKS: ECONOMIC STAGNATION
We are mindful that there are factors that could derail our optimistic outlook. The biggest risk to our base case
scenario for a rapid recovery in 2021 is a notable setback on the vaccine front that would ultimately result in a
prolonged period of economic stagnation. In this dire scenario, reopening plans would be delayed and even reversed
and the population would head back into partial lockdown-mode, which would make way for a stagnant growth
environment through 2021 as heightened levels of fear and anxiety leave consumers and businesses hesitant to spend
until a vaccine is made available. The good news, however, is that the latest vaccine developments combined with the
unprecedented monetary and fiscal impulse has significantly reduced the likelihood of this calamitous outcome.
2021 Outlook 4CONTACT US
North America
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