On the record: Outlook 2021

Constructive on risk assets 

Overall, we are quite positive for 2021. We have a reasonably constructive view on risky assets, which seems to be the consensus view, and this is not trivial, given the extraordinary year and decade we had. Risky assets have performed exceptionally well in the past decade, and even this year stocks could end up in positive territory.

This conviction is justified by several observations. We are seeing an acceleration in economic growth, albeit from a very low base, which is fuelled by unprecedented monetary and fiscal stimulus. Next year will be characterised low interest rates and low inflation. 

The overall policy outlook seems to be improving. One example is global trade. While it is hard to hold a positive view, there are elements to suggest that trade will improve rather than worsen. The change in the US administration and the Regional Comprehensive Economic Partnership (RCEP) agreement in Asia are two of those elements. 

Finally, scientists seem to be closing in on a COVID-19 vaccine. These things combined make me constructive on risk assets in general.

However, there are a number of bridges to cross. One is the second wave of the pandemic, which appears to be hitting the US at the moment. The change in the US administration and the recent veto of Poland and Hungary to the EU Recovery plan are delaying fiscal stimulus in the US and Europe, respectively. 

Looking beyond 2021, the COVID-19 crisis has exacerbated a number of structural trends. Some of these trends, like digitalisation and the transition to a green economy, are positive. 

However, lower-for-longer interest rates are aggravating the problem of global debt. The outlook is complicated further by the fact that while inflation is absent now, it will likely start rising in the near future.  

This is not necessarily going to be the focus of markets for next year, but it would be a mistake not to think about it. The magnitude of global debt is staggering. This has a potential to cause a clear regime change at monetary policy level. As a collective, we have to reflect on the possible implications. 

Looking to alternative credit  

During this difficult year, we tried to maintain our focus on investing for the long term. Nonetheless, when there are market dislocations such as the one that occurred in March, we have an opportunity on the listed side, where our managers can add value by buying oversold assets. 

In our case, we took some money out of our bond portfolio in March and put it into equities, mainly using derivative index products. It was helpful but not hugely significant toward the long-term performance of the fund.

At the moment, because of the strength of the rebound, we are taking profits from those trades to some extent. 

Looking forward to 2021, I expect that the markets will discriminate between stocks more than they did in previous years. There are still value opportunities but equally there are businesses that are likely to be permanently damaged by the pandemic.

Tech stocks are likely to continue to appreciate, although perhaps not as strongly as they did during 2020.  

When building our fixed-income allocation, we need to look at alternative credit. We are comfortable with the added risk that comes with this area of the market, because it is lower than equities, which is where the funding is coming from. 

Provided that our alternative credit investments can provide us with an appropriate level of liquidity, which is something we need to keep in check, we are comfortable with tying our money up. 

Reasonably priced equities are attractive

As a pension fund, we came into the COVID-19 crisis with quite low levels of risk, which meant performance this year is very good. 

Looking to 2021, we expect volatility on markets. Monetary and fiscal stimulus will have to bridge the gap between now and the implementation of a vaccine. 

There are questions about inflation and the sustainability of the debt created as part of the various stimulus programmes in the longer term. 

However, in the medium term, risky assets could perform well, once a vaccine is in the pipeline to be implemented. 

The financial system is awash with money that needs to be invested, and much of that money will not be invested in low or negative-yielding government bonds. 

In terms of manager selection, most of our managers performed well this year. It will be crucial to find managers that can deliver alpha, whether it is against a benchmark or on an absolute-return basis.

Because of the volatility that markets are likely to experience, as well as the low-interest-rate environment, investors simply cannot rely on beta. 

Thankfully, the crisis has opened up a lot of interesting opportunities with some of the best managers. Some absolute return funds that were closed prior to the crisis have reopened for new investors. 

Interviews by Carlo Svaluto Moreolo