Fund managers and analysts have put their thoughts to 2021 and prospects for investors and are on balance optimistic, in large part due to the emergence of a vaccine for covid-19.
“I’m broadly positive going into 2021,” said Darius McDermott, managing director, FundCalibre. “We have more than one vaccine in the offing, Brexit will be completed one way or another and we have a US president who is likely to be less unsettling.
“Yes, we have mountains of debt, a global recession and we’re bound to have hiccups along the way… but some of the uncertainty has been removed, we know what needs to be done to enable a recovery and both governments and central banks around the world are being supportive.
“To me this means 2021 should be good for risk-on assets – in both equity and bond markets.”
Managers of investment funds interviewed by the Association of Investment Companies also put the vaccine roll out across the globe, and the threat of covid-19 receding as the greatest cause for optimism next year, with 38% highlighting this positive. However, the AIC says managers are also optimistic about the possibility of technology driving economic growth, with this and a value-growth rotation each receiving 14% of responses.
Investment company managers have tipped Emerging Markets to outperform in 2021: despite many developing economies having been hit hard by the pandemic, 24% of managers feel Emerging Markets are most likely to reward investors next year, followed by the UK (19%) and the US (14%).
Managers are bullish on Emerging Markets and the UK over the longer term too. On a five-year view Emerging Markets and Asia Pacific excluding Japan were seen as the most attractive opportunities, each receiving 19% of the votes, with the UK and US tied in second place with 14% of responses each.
McDermott is also emerging markets benefiting investors.
“I think the US dollar will remain weaker for some time,” he says. “This will benefit Asia and broader emerging markets. Asia in particular has generally handled the pandemic well and has just struck a new inter-regional trade agreement. Calmer relations between the US and China will also help. Developed markets should also be positive but not to the same extent as we have seen in recent years. The one exception could be the UK – if we get a positive Brexit outcome it has a lot of catching up to do with its global peers.”
McDermott suggests fund to consider include: Guinness Emerging Markets Equity Income, Fidelity Asia Pacific Opportunities and AXA Framlington UK Mid Cap
Carlos von Hardenberg, Manager of the Mobius Investment Trust, said: “Over the coming years, we expect further significant positive economic development in particularly Asia and Latin America, as well as Africa. The past year has led to an acceleration of healthcare spending and investments, triggered another leg forward towards distant learning and related technologies, and underlined the importance of ecommerce as the new bricks and mortar. Asia and many emerging markets have made impressive progress in the development of proprietary technology, but also towards a more sustainable and environmental and socially acceptable industry overall. We believe that a rotation back into Emerging Markets will lead to a normalization of the large discount Emerging Markets are trading at today, and solid corporate earnings will be accompanied by improved macroeconomic tailwinds.”
Best performing sectors
Almost a fifth (19%) of investment company managers believe Healthcare Equipment & Services will be the best-performing equity market sector in 2021. On a five-year view, managers favoured Travel & Leisure companies to outperform, with 19% nominating the sector to recover strongly from a catastrophic 2020.
Andrew Bell, Chief Executive Officer of Witan Investment Trust, said: “The future looks very positive, with revolutions in information technology and medical science transforming lives for the better. Investment in infrastructure will help drive recovery from 2020’s economic shocks. Asian consumption, technology and biotechnology remain key long-term themes. Near-term, banks and the travel and leisure sectors are likely to bounce strongly as investors make a rational analysis of their prospects rather than extrapolating the awful short-term trends from 2020.”
McDermott advises a small not large focus: “Larger companies have been outperforming of late, helped in no small amount by the big tech names, which have been responsible for some 70% of stock market gains this year in some countries,” he said. “Smaller companies, which have paid the price of investor uncertainty in 2020, have relatively attractive valuations and should do well going into a recovery.”
And here he highlights ASI Global Smaller Companies, Federated Hermes Global Emerging Markets SMID Equity and BMO Global Smaller Companies
And McDermott suggests commodities and infrastructure will take the edge over larger tech players.
“The big tech companies will continue to do well as they have momentum behind them in the form of structural change,” says McDermott. “But I don’t expect the same dominance as was shown in 2020. Instead, commodities and infrastructure look interesting. Both should benefit from economic recovery. While oil has potentially already had its bounce, metals will be key, especially as the push for electrification and renewable energy gathers pace. “
Funds to consider he says are Ninety One Global Gold, First Sentier Global Listed Infrastructure and VT Gravis UK Infrastructure Income
Interest rates rising is seen by investment company managers as the biggest threat next year (19%) followed by high equity valuations (14%).
The AIC says despite the economic fallout from the pandemic, 90% of managers believe UK interest rates will not turn negative in 2021 and 71% feel it is either ‘unlikely’ or ‘very unlikely’ that we will see a significant increase in inflation. However, on a three-year view 77% of managers believe a significant increase in inflation is either likely or very likely.
Interest rates will also impact on prospects for growth and value.
“If November taught us anything it’s that investors shouldn’t write off value strategies completely,” McDermott continues. “The rotation caused by the first vaccine news has reminded us why it’s unwise to be ‘all-in’ one style. While we believe growth will still do well in a low interest rate environment, having some value in a portfolio could reap rewards too.”
For value he suggests TM CRUX UK Special Situations, Invesco Asian and Schroder Global Recovery
And for bonds he suggests corporate not government bonds.
“Government bonds in the developed world are offering little yield and little capital upside. Inflation could be on the horizon – perhaps in 2022 – which could also make a bad situation worse. I prefer investment grade and high yield bonds, which offer better yields and again should do better in a recovery environment. Emerging markets bonds also have more room to manoeuvre, as interest rates are higher.”
Funds to consider he says: Baillie Gifford High Yield Bond, BlackRock Corporate Bond and M&G Emerging Markets Bond
Where will the FTSE 100 end 2021?
Investment company managers are optimistic about the prospects for global stock markets, with 67% believing they will rise in 2021 and only 10% believing they will fall. Nearly two-fifths of managers (38%) feel the FTSE 100 will close between 6,500 and 7,000 next year. A third (33%) were more optimistic about the UK’s blue-chip index, with 7,500-8,000 (19%) and 7,000-7,500 (14%) the next most popular choices.
Finally, the AIC reports that in a year where the pandemic impacted everyone’s lives, 62% of managers reported that their investors’ interest in ESG had increased due to covid-19.
Steve Cook, Portfolio Manager of Sequoia Economic Infrastructure Income Fund (SEQI), said: “There is no denying that 2020 has been a challenging year for us all, with widespread economic uncertainty hitting the markets. Looking ahead to next year, although there are still many unknowns, one thing we can be sure about is an increased focus on ESG. The covid-19 crisis has accelerated the shift towards sustainability, with businesses across the country calling for a green recovery, and these issues will no doubt be at the top of investors’ priorities. At SEQI, we are looking forward to continuing to implement our ESG policy and playing whatever part we can in enabling the transition to a lower carbon world.”
Further reading: A survey of the emerging markets landscape for investors