Executive Summary

  • In 2021, we expect the early cycle recovery of the global economy to provide a tailwind for risk assets.
  • We remain overweight equities and have added selective exposure to more cyclically oriented sectors including industrials, materials, semiconductors, housing, and consumer durables. We continue to seek opportunities in sectors that may benefit from longer-term disruption, such as technology companies.
  • We see pockets of opportunity in certain segments of the credit markets. We continue to favor housing-related credits given strong fundamentals, along with select higher-quality investment grade issuers and sectors.
  • We believe it remains critical to build resilient and diversified portfolios that can withstand a range of economic scenarios. We see two primary risks to our positioning – lower growth and higher inflation – and we are focused on hedging against these.

Asset Allocation Outlook

Despite a challenging year in 2020, for financial markets the year has been extraordinary. The global pandemic was a black swan event that caused the biggest quarterly drop in global GDP and increase in unemployment since the Great Depression. The drawdown in equity and credit markets was one of the fastest on record. There were many other firsts: Oil prices temporarily became negative, volatility (VIX) surpassed levels observed during the depth of the global financial crisis, and already robust central bank balance sheets ballooned $7 trillion more.

Yet, if the market meltdown was unprecedented, so has been the recovery that followed. In short, nothing about 2020 was normal. We believe 2021, in contrast, will feature a slow and steady return to normalcy. With further advancements in COVID testing, contact tracing, and vaccine deployment diminishing the need for social distancing, economic growth should recover further. The improvement in fundamentals should bode well for risk markets and cyclical assets in particular.

Looking back over the year, we have gone – rather abruptly – from a late cycle environment in December 2019 to an early cycle environment in December 2020. Back in late 2019, we were concerned about slowing growth, rich valuations, and high levels of corporate leverage. While almost no one, including us, predicted how the pandemic would unfold in different parts of the world, its aftermath has left the global economy in a completely different place in less than a year. As the global economy transitions to an early cycle phase, we expect profit growth to accelerate, although a high degree of uncertainty remains on the speed and strength of recovery given the opposite forces of slow economic activity and record monetary and fiscal stimulus.