2021 outlook: Knowns and unknowns after a tumultuous year

Sponsored article: William Davies of Columbia Threadneedle looks at the factors affecting investments this year—Covid, Brexit and the US election result.

We see three themes dominating 2021: the rollout of effective Covid-19 vaccines; the political make-up of the US following the November election and the forthcoming runoff elections that will decide which party controls the Senate; and Brexit.

With Covid-19, it is all about knowns versus unknowns. For example, we know numerous vaccines are expected in 2021, but we do not yet know how rapid the uptake from the general public will be. We know that while the end of the pandemic is coming, the fundamentals are likely to deteriorate first because many economies are still shutting down – it is getting worse before it gets better.

But markets have begun to look through the short term to the sunny upside of the vaccine-led recovery. That should bring forward economic recovery by as much as nine months, meaning we see a recovery to pre-pandemic levels by early-2022 or possibly even the end of 2021.

Healing

In terms of US politics, Biden appears to be a more stable, consistent leader and we anticipate he will more likely heal domestic divisions as well as repair international relationships. He has talked about rejoining the Paris accord, for example, and this will have a positive impact on slowing climate change and aligning the US with other nations.

Given that the Democrat’s Senate “majority” is so slim, we will probably find ourselves in something of a middle ground, which is a reasonably healthy position for equity and credit markets. Medium term it is certainly one that benefits the likes of US utilities, consumer staples and tech, but which may have negative implications for financials, energy and health care (although financials and energy are likely beneficiaries from the recovery/vaccines, albeit not as much as if stimulus were greater).

As for Brexit, we now have a deal but, going forward, it will be important for the UK prime minister to build a relationship with Biden in the US, just as it is also crucial that Biden builds a strong relationship with the EU.

Research Intensity

As asset managers we are only able to navigate our way through the potential scenarios and impacts from the above factors because of our research capabilities, what we call our Research Intensity. These power our understanding of themes, trends and events, lead us to attractive investment opportunities and allow us to maintain an element of calm in the midst of “panic”.

Following unprecedented levels of stimulus the level of debt is going to be even greater than it was after 2009 and we will emerge into a world of low inflation, low growth and low interest rates—not a backdrop where economic sensitivity is likely to outperform over the longer term.

Instead, this environment will favour the type of investments that Columbia Threadneedle Investments makes—long-duration assets and durable growth companies with sustainable returns driven by a sizeable moat; a high Porter’s Five Forces score; strong environmental, social and governance credentials and sustainable competitive advantage. We want risk within portfolios, but we want controlled risk.

The UK equity market is clearly cheaper than others and may benefit if we see the recovery we expect to see over the next nine to 12 months; Europe and Japan are in a similar position. Longer term, we can see further potential in the US and Asia/emerging markets.

We like an element of risk within credit, but we believe investment grade is ultimately a better home for it than high yield, where we see a greater risk from higher financial leverage, particularly when coupled with high operational leverage.

As active managers we have performed strongly throughout the pandemic crisis, using our knowledge, expertise, collaborative skills and research capabilities to remain calm. This consistent approach will continue to be followed in 2021, helping us identify trends and investment opportunities, whatever next year may bring.

William Davies is chief investment officer EMEA at Columbia Threadneedle Investments.

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