Themes expected to play out in 2021

IT IS early days yet into 2021 and the question uppermost in investors' minds must be whether valuations are too rich in both equity and fixed income.

Here is the consensus, based on views of asset managers contacted by Wealth: Equities remain the favoured asset class, thanks to a persistent low-rate environment and signs of budding global economic growth.

This is despite the robust showing among major equity indices in 2020, particularly after the March lows. But as always, brace for volatility. Within equities, managers expect a rotation into sectors that suffered the most through the pandemic. In fixed income, an improving economic backdrop should reduce default risk, but favour high quality credits.

Here are some themes that are expected to play out in 2021:

Toby Hudson, Schroders head of Asia ex-Japan equity investments

• Rise of e-commerce in Asia. Its penetration is unlikely to recede as consumers are hooked on the added convenience of these services.

BT in your inbox

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign Up

Sign Up

• Shift towards 5G telecoms to continue in 2021. Chipmakers are set to benefit from rising prices of memory, after a downturn in 2019 and 2020. Digitisation of many areas of the economy will continue, driving demand for increased processor power, bandwidth and storage.

Philip Saunders, Ninety One co-head of multi-asset growth

• Acceleration of de-carbonisation. The low-carbon transition will be fuelled in 2021 and beyond by regulatory support and improvement in corporate investment appetites. This is positive for businesses offering products and services that will facilitate the energy transition.

• Gold and gold stocks. Gold has corrected ... We think this adjustment is largely due to technical factors such as heavily overbought positions being unwound, rather than fundamental ones. Real interest rates remain low and may move lower as inflation pressures build. After some consolidation, gold should revert to its medium term uptrend.

Vincent Mortier, Amundi group deputy chief investment officer and Asia ex-Japan supervisor

• Rotation into equities. Lower expected returns in bonds amid low interest rates and tight credit spreads mean that investors have to embrace higher risk (or equities) to reach their return target.

• ESG (environmental, social and governance) wave in green and social bond issuance. In Europe, green bonds could help the recovery via EU Recovery fund-related issuance. The social bond market has seen strong growth and Covid-19 will intensify this trend.

Neeraj Seth, BlackRock head of Asian credit

• Three key trends: Search for income becomes more profound in 2021 and beyond. Lower for longer in terms of global bond yields. Rise of Asian fixed income or credit in global portfolios.

• Asia fixed income is at a sweet spot, providing high income with stable fundamentals. Asian corporates have not gone on a debt spree like many developed market peers, and have less exposure to vulnerable sectors like energy and transportation. Relative valuations in Asia are also attractive with about 60 basis points spread pick-up of Asia investment grade (IG) over US IG, and 300 basis point spread pick-up of Asia high yield (HY) over US HY.

Tai Hui, JP Morgan Asset Management Asia chief market strategist

• US and China remain long term core allocations, but previous laggards such as Asean, Europe and Japan are less expensive and will be geared to the global recovery.

• Tech and healthcare have historically generated shareholder value over economic cycles. But some of the sectors worst hit by Covid-19 should enjoy the strongest rebounds in the next 12 to 18 months.

• Fixed income valuations across the board (corporate credit, emerging market debt, government bonds) are already expensive. This suggests the key source of return will be the bonds' interest. But with improvement in the global economy and accommodative monetary policy, corporate HY bonds and EM debt should enjoy belowaverage rates of default.

Murray Collis, Manulife Investment Management deputy chief investment officer, fixed income, Asia ex-Japan

• Constructive on Asia fixed income in 2021. We expect a more favourable macro-economic landscape as the global economy moves towards a gradual recovery. Defaults to remain reasonably contained and idiosyncratic in the first half of 2021. Credit selection will be key in Asia as recovery may be uneven.

• Continued development in sustainable investment opportunities in Asia, including strong growth in ESG bond markets (green, social and sustainable bonds).

George Efstathopoulos, Fidelity International portfolio manager.

• Our income-generating funds still run a moderate level of risk, with a preference for HY and EM debt where we see the best value for underlying corporate fundamentals.

• Equities can still do well, but better global growth is more likely to play out through a rotation within markets, rather than a broad rally, given where average valuations are. (Sectors) more geared to the economic cycle, such as financials, could perform best.

• Investments in Chinese government bonds and the Japanese yen and flexibly managing our equity risk using derivatives, should help improve the resilience of our funds.