In our Outlook 2021, we put risks into perspective and look at the opportunities.
Hi, I’m Andy Goldberg, Head of Market Strategy here at J.P. Morgan. 2020 was an intense and tumultuous year, marked mainly by the global coronavirus pandemic. The pandemic created unprecedented levels of uncertainty and market volatility, not to mention the human toll.
But as we got to summer, it had become clear that on the backs of unprecedented monetary and fiscal stimulus, in our own advancement, in terms of understanding more about the disease, that the world was beginning to recover.
Our 2021 Outlook explores five key foundational questions, the answers to which we believe will be the key determinants of asset prices in 2021.
The five are the pandemic.
While COVID-19 remains a key risk for markets and the economy around the world, we are getting closer to the eventual full approval and distribution of a would-be vaccine. That bodes well for markets.
What about policy? In 2021, policy will continue to be supportive of the ongoing recovery. Investors should be prepared to harness the power of this recovery, predicated largely on policy support.
Investors should focus on assets that are levered to the reflation trade, including U.S. and Asian equities, digitally exposed companies and companies exposed to energy transitions as the future of transportation, as we look to harness the power of this recovery.
What about inflation? Our low inflation, low interest rate outlook means that cash is not your friend. It’s too hard to find yield there.
You need to expand your toolkit to address both problems. Look at assets that benefit from reflation like the stock market and risk assets. And also on the yield side, look at direct real estate, REITs and infrastructure.
Can equity valuations continue to support higher market prices? Low interest rates also make the valuation on equities more sustainable than they otherwise might be. When you buy stocks today, you’re not getting a bargain, but we do believe they’ll outperform bonds in 2021.
And then finally, the direction of the dollar.
While we don’t expect a large drop in the dollar, the ongoing global healing process suggests some potential for dollar weakness. Continue to get exposure to non-U.S. assets, including emerging markets and China as a result.
We hope you enjoyed our 2021 Outlook and took away some clarity in a world that can often be confusing. A final reminder, please check in with your J.P. Morgan team, review your portfolio. Is it right for you? Does it have the right level of risk as we enter into a new phase of this recovery?
Thank you very much for joining.
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Outlook 2021. The global economy will heal. Embrace the optimism.
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A photo montage shows business professionals, healthcare workers, and technologists working in a metropolitan city. Many wear face masks. Then, a man with short dark hair and a blue business suit, Andy Goldberg, speaks from a spacious office with large windows overlooking Manhattan.
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Andy Goldberg, Global Head of Market Strategy, J.P. Morgan Private Bank.
Andy Goldberg:
Hi, I’m Andy Goldberg, Global Head of Market Strategy here at J.P. Morgan. 2020 was an intense and tumultuous year, marked mainly by the global coronavirus pandemic. The pandemic created unprecedented levels of uncertainty and market volatility, not to mention the human toll. But as we got to summer, it had become clear that on the backs of unprecedented monetary and fiscal stimulus, in our own advancement, in terms of understanding more about the disease, that the world was beginning to recover. Our 2021 Outlook explores five key foundational questions, the answers to which we believe will be the key determinants of asset prices in 2021.
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1 – The Virus Outlook: Will a vaccine be the "silver bullet" that some expect?
Andy Goldberg:
The five are the pandemic. While COVID-19 remains a key risk for markets and the economy around the world, we are getting closer to the eventual full approval and distribution of a would-be vaccine. That bodes well for markets.
Text on screen:
2 – Policy: Can the central banks keep this recovery going?
Andy Goldberg:
What about policy? In 2021, policy will continue to be supportive of the ongoing recovery. Investors should be prepared to harness the power of this recovery, predicated largely on policy support. Investors should focus on assets that are levered to the reflation trade, including U.S. and Asian equities, digitally exposed companies and companies exposed to energy transitions as the future of transportation, as we look to harness the power of this recovery.
Text on screen:
3 – Inflation: Will inflation be too high?
Andy Goldberg:
What will that all mean for inflation? Our low inflation, low interest rate outlook means that cash is not your friend. It’s too hard to find yield there. You need to expand your toolkit to address both problems. Look at assets that benefit from reflation like the stock market and risk assets. And also on the yield side, look at direct real estate, REITs and infrastructure.
Text on screen:
4 – Equity.
Andy Goldberg:
Can equity valuations continue to support higher market prices? Low interest rates also make the valuation on equities more sustainable than they otherwise might be. When you buy stocks today, you’re not getting a bargain, but we do believe they’ll outperform bonds in 2021.
Text on screen:
5 – The Dollar: Will it weaken?
Andy Goldberg:
And then finally, the direction of the dollar. While we don’t expect a large drop in the dollar, the ongoing global healing process suggests some potential for dollar weakness. Continue to get exposure to non-U.S. assets, including emerging markets in China as a result. We hope you enjoyed our 2021 Outlook and took away some clarity in a world that can often be confusing. A final reminder, please check in with your J.P. Morgan team, review your portfolio. Is it right for you? Does it have the right level of risk as we enter into a new phase of this recovery? Thank you very much for joining.
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Visit privatebank.jpmorgan.com/outlook.
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Welcome news of COVID-19 vaccines has arrived at the end of a difficult 2020. The first vaccine shots have been given, and the end of this global pandemic is beginning to come into view. Equity markets have responded by soaring to all-time highs, with stocks of companies in industries most affected by virus restrictions rallying in anticipation of a return to normal.
We do still have to wait—and no one knows yet how long. Vaccinating the world’s population is no small feat. Meanwhile, coronavirus case counts are rising across the globe. The death toll is mounting in the United States. Plus, the global economy is not yet completely out of the woods. Businesses most hurt by restrictions seem to need, badly, additional support from governments.
For investors, such uncertainty can cause anxiety. We find comfort by investing in areas where we have greater visibility. Bigger picture, we believe the global economy will continue to heal. In fact, by the end of the summer, it seemed the healing process had already started, with some sectors, including technology and housing, doing remarkably well in the new environment. From here, the contours of the recovery will likely be defined by five big forces in 2021: the virus, policy, inflation, equity valuations and the dollar.
Because fiscal and monetary policy will continue to drive investment outcomes, we look for beneficiaries of policy support: U.S. and Asian equities, companies exposed to physical and digital infrastructure investment, energy transitions and the next generation of transportation. Also, because policy rates will likely remain near zero for a few years, yield will be hard to come by. Two places to find it: U.S. high yield bonds and preferred equities. We also think investors should focus on assets that do well during periods of modestly rising inflation, such as equities, real estate, infrastructure and commodities.
Yes, equity valuations are high, but we believe high valuations are generally deserved. They may even be the “new normal”—so long as global central banks stay accommodative and long-term interest rates remain near secular lows (and we think both are good bets over the medium term). We also believe stocks are likely to generally outperform fixed income and cash in 2021. On the currency front, the dollar will likely weaken modestly as the global recovery proceeds. Investors should keep an eye on currency exposures and consider beneficiaries of a weakening dollar, such as emerging markets.
In sum, as the global economy heals, markets will offer a wide range of opportunities to uncover, and risks to manage.
What might derail the recovery?
For markets, we see three key risks (in addition to the virus): failure to provide enough policy support; an escalation in the tech war between the United States and China; and certain geopolitical flashpoints.
Policy support has driven economic recovery to date and, in many regions, will likely continue to do so. Some policymakers may hesitate to provide more, citing concerns about government debt levels. We believe most will conclude that the near-term benefits of providing additional support outweigh the potential long-term costs.
Meanwhile, there’s a tech war between the United States and China that’s unlikely to stop even if a Biden administration warms relations by adopting a more traditional tone. The ramifications of this tech war will take years to play out, but the choices each country makes today will impact companies, sectors and even regional economies. Right now, both nations are focusing on reallocating their supply chains to less volatile trading partners and innovating to create new domestic production. For policymakers, that adds impetus to invest in fundamental research and commercial R&D. For investors, the focus on innovation may create opportunity in accelerated technological progress.
Various conflicts around the world also threaten to divert investors’ attention from the global recovery (though we think they are unlikely to occur): For example, military tensions between China and the United States are rising as China presses its territorial claims (in the South China Sea and elsewhere in Asia).
How do you invest in today’s environment?
To combat the anxiety that all these uncertainties generate, we plan to focus on three themes: navigating volatility, finding yield, and capitalizing on opportunities in the megatrends of digital transformation, healthcare innovation and sustainability.
To navigate volatility, we believe core bonds still provide the most efficient buffer against equity volatility, but think other asset classes and vehicles (such as hedge funds) should be added as a complement. Within the equity market, certain types of exposure may be less volatile than the market as a whole. Companies with strong balance sheets and stable growth profiles can help protect capital in volatile markets.
Prospects seem bleak for investors seeking income. As the big three global central banks may not raise rates for years, investors may want to hold less cash, and consider other means to maximize yield for strategic cash reserves. To enhance yield in “core” fixed income, we think investors should consider slightly extending duration and rely on active management in mortgage-backed securities, municipal debt and portions of the investment grade corporate market.
To augment income, investors also may look to increase risk. Our preferred space is the upper tier of the high yield corporate market. The U.S. BB-rated index has a yield around 5%, and we expect default rates have already peaked. In addition, a modest amount of leverage on an investment in the upper tier of the high yield market can increase the effective yield in the right situation.
But if you are searching for the stocks with the potential to outperform in the next few years, we think the best places to look are in three megatrends: digital transformation, healthcare innovation and sustainability.
Over the last five years, more than 1,700 stocks have contributed to the return of the MSCI World Equity Index. But only 42 stocks increased their market capitalizations by more than 4X when they were part of the index. Of those big winners, over 60% came from the technology and healthcare sectors. Meanwhile, 2020 was a breakout year for sustainability and sustainable investing; the S&P Global Clean Energy Index was up nearly 100%.
Digital transformation was the defining market trend of 2020 as businesses, consumers and families learned how to live in an online world. Yet we are just beginning to see the ways in which technology will influence future production and consumption (think 5G).
Healthcare innovation—its value and importance—was made painfully clear by the global pandemic. But the demand for healthcare innovation is longstanding and nearly ubiquitous. We see significant investment opportunity in testing and diagnostics, not only for COVID-19, but for many other diseases as well. Even before the pandemic, laboratory testing was the single-highest-volume medical activity in the United States, with an estimated 13 billion tests performed each year.[1]
Sustainability is a powerful trend that will grow in force in the coming years. We expect a big step forward toward developing a more circular economy, especially in the food industry.[2] By 2030, a circular economy[3] could yield up to $4.5 trillion in economic benefits, solving the annual problem of 1.3 billion of tons of food waste, 92 million tons of textiles in landfills and 45 trillion gallons of water wasted just through annual food production.
Remember: Your goals are your North Star
We believe this young recovery could last for years. But before you act on this kind of optimism, make sure you have a solid, long-range investment strategy that aligns with the goals you have for yourself and your family. Planning holistically is the only way you can truly build—and keep full confidence in—your investment portfolio.
Speak with your J.P. Morgan team about your plan; the team can help you find your opportunities and meet the challenges that 2021 will bring. In the meantime, to see more of our Outlook 2021, click here.
[1] “The Healthcare Diagnostics Value Game,” KPMG. 2018.
[2] With today’s global population of 7.8 billion people set to increase by another 2 billion people over this coming decade, the strain on our planet’s resources is going to grow exponentially. In fact, if we continue on this path, by 2050, global demand for resources will overuse the planet’s capacity by more than 400%.
[3] A circular economy is one in which there is no waste because all leftovers from production are fed back into the system and used to create new usable products.
