Our core scenario is for a relatively robust recovery in the second half of 2021. But given the unprecedented nature of both the shock and the policy reaction we should not underestimate the risks. In our view, the main upside risk is that the vaccine is rolled out more quickly and the recovery is stronger and more synchronised globally. Our downside risk is centred on an unexpected rise in inflation which forces a more rapid withdrawal of monetary stimulus than the market currently expects.
Inflation/ taper tantrum
- Inflation rebounds more quickly than expected.
- Central banks stop easing, turn more hawkish.
- Yield curves steepen causing debt burden to rise.
- Governments taper fiscal support.
- Companies focus on deleveraging.
- Equities fall and underperform government bonds.
- Fixed income challenged as carry trades unwind. HY losses most significant but IG also affected by change in perception of central bank backstop. Index-linked bonds outperform.
- EM underperforms across equities, fixed income and currencies.
- Core infrastructure and real estate outperforms.
- Dollar strengthens.
H2 robust recovery
- Activity remains weak during winter months. Vaccine rolled out in H1 allowing full reopening of economy in Q3. Growth accelerates and broadens.
- Central banks signal intent to keep interest rates low well into the cycle and continue asset purchases through H1 at least. (US 10yr Treasury yield to trade <1.5%).
- Brexit deal and EU recovery fund ratified.
- Governments do not revert to austerity but do not act as major source of new stimulus.
- North Asian growth outperforms US/ eurozone.
- Overweight to equities.
- Real returns in government bonds challenged. Fixed income opportunities limited to IG and selective high-quality HY and EMD.
- Rotation of cyclical Covid winners/losers (e.g. ecommerce to in-store retail).
- Secular themes remain supportive for segments of growth and challenging for segments of value, preventing a full style rotation.
- Asian equities and fixed income outperform.
- Long-term opportunity for reasonably valued companies providing solutions to climate change.
- Focus on companies that screen well on ESG characteristics.
- Focus on alternative diversifiers and income-producing assets (macro funds, real assets).
- Dollar weakens gradually on broad basis.
Strong, synchronised global growth
- Medical solution is quick and easy to distribute and facilitates quick reopening in H1.
- Pent-up demand from consumers stronger than expected.
- Fiscal authorities announce large-scale investment packages to spur growth and reduce inequality.
- Inflationary pressures build but not enough to deter central banks from low-rate commitments.
- Multilateral coordination to promote trade and investment to tackle climate change.
- Sizeable overweight to equities.
- Real returns in core fixed income strongly challenged. Yield curve steepens. HY and EMD preferred.
- Strong value and cyclical recovery, particularly financials. Small cap outperforms.
- Europe/UK/ broader EM outperformance.
- Dollar weakens materially on broad basis.
More key themes for 2021
Past performance and forecasts are not reliable indicators of current and future results.