Looking past COVID-19 to an improving outlook for 2021
The economic recovery has been exceeding expectations, vaccine developments are promising and markets have responded positively to the outcome of the U.S. presidential election. Our growth forecasts for 2021 have featured more upgrades than downgrades and are now situated modestly above the consensus.
Bond yields hover around historic lows
Central bankers have expressed a commitment to keeping short-term interest rates extremely low to stimulate economies and financial markets. Longer-term bond yields have a bit more room to rise, but the scope for increases is limited by secular pressures. We now look for a more gradual and ultimately smaller rise in real rates of interest.
Global equities soar to new highs and vaccines trigger style rotation
Stocks surged from their March lows due to a combination of massive stimulus, a gradual reopening of economies and, more recently, the promise of imminent vaccines. The latest rally pushed the S&P 500 Index to a new record and many other markets are also showing gains this year.
Executive summary
Buoyed by ultra-low interest rates and fiscal stimulus, financial markets calmed and stocks rose to record levels as economic normalization drew closer and the recovery progressed.
Economy
The pandemic remains the key challenge for economies as we approach the New Year, with case counts and fatalities reaching near record levels – but there are reasons to be optimistic.
Fixed Income
Our new modelling forecasts that sovereign bond yields everywhere will drift just slightly higher over the next year, acting as a modest headwind to total returns for bondholders.
Equity Markets
With the economy entering a period of normalization supported by low interest rates and ample fiscal stimulus, stocks continue to offer superior return potential versus fixed income.
Asset class commentary
The pandemic that engulfed the world in early 2020 is still the dominant issue as the year winds down. The return of stricter social-distancing rules to fight the current wave are set to inflict mild to moderate economic damage at the end of 2020.
Regional preferences
Market views
Direction of rates
Emerging markets outlook
The emerging-market equities team has been focused on two aspects of index performance and their impact on the outlook for stocks. The first is the increasing concentration of Chinese stocks in the MSCI Emerging Markets Index and the second is the extreme underperformance of emerging-market value stocks relative to growth stocks.
Our 12-month forecast is for the British pound to remain at 1.33, which would see it weaken relative to other currencies as the U.S. dollar declines.
Leading up to President-elect Biden’s inauguration and through the 100-day period, emerging-market currencies will be the main beneficiaries of a weakening U.S. dollar.
We remain moderately constructive on the Canadian loonie, thinking that it will strengthen to 1.27 per U.S. dollar from its current level of 1.31.