with Brad Tank, Erik L. Knutzen, and Anthony D. Tutrone.
The heads of Neuberger Berman’s investment platforms identify 10 key themes they anticipate will guide investment decisions in 2021, as summarised below.
Macro: the world after coronavirus
1. A return to early-cycle dynamics but no substantial reflation
The coronavirus pandemic caused a deep recession that has set a low base from which to rebound. We now face early-cycle dynamics not seen for a decade with above trend-line GDP and corporate earnings growth, declining unemployment and rock-bottom interest rates. In addition, we see limited drivers of substantial inflation before 2022, and, without significant continuing fiscal stimulus, no clear change in the underlying causes of secular stagnation.
2. Populism is here to stay
The end of Donald Trump’s presidency is not the end of political populism or its causes in the U.S. or more broadly. This likely means continued political and geopolitical volatility, but perhaps more importantly, it also makes additional fiscal stimulus more likely, as governments pursue borrow-and-spend policies seeking to address the causes of populist discontent. The efficiency and effectiveness of these policies will likely be key in assessing the likelihood of avoiding secular stagnation.
3. Accelerated digital transformation puts down roots
During the coronavirus crisis, many consumers and businesses have fully embraced working, shopping and accessing services from home. The case for digitalisation and automation in factories, warehouses, offices, homes and other workplaces has been strengthened. Some of this is likely to spring back once the pandemic eases, but in our view the trends have not only accelerated but permanently transformed many consumer and business practices. During 2021, we will move firmly into the world of 5G connectivity, the Internet of Things and cloud computing.
4. Supply chains become shorter and more diversified
Geopolitical uncertainty, economic populism and simple wage and cost convergence have been shortening global supply chains for more than a decade already. The coronavirus pandemic added further impetus to this trend. The ongoing transformation of supply chains can reduce companies’ and industries’ exposure to disruption risk, but at some cost to investors and consumers.
Fixed income: static yields, volatile currencies
5. Low yields and flat curves demand opportunism in credit markets
As with every recession, the 2020 coronavirus recession caused credit spreads to widen. Rapid and substantial central bank intervention made this an exceptionally short-lived phenomenon, leaving investors with a highly complex mix of early- and late-cycle characteristics, and default and valuation risks. We think this demands a flexible, 'go-anywhere' approach to credit, backed up by the ability to make relative value assessments across fixed income sectors, broad expertise and nimble decision-making.
6. Macroeconomic dynamics will be expressed through currencies
The major central banks have signaled their intention to maintain low interest rates a long way out on the yield curve. With rate volatility suppressed, worldwide growth and inflation differentials are more likely to be expressed through currency markets. Heightened currency volatility and the end of persistent U.S. dollar strength would strengthen the case for dynamic currency hedging.
Equities: cyclical opportunities, long-term themes
7. Secular growth stocks ultimately prevail over cyclical rallies
Early-cycle dynamics will likely favor cyclical stocks initially as economic growth accelerates, but ultimately, we believe the looming backdrop of secular stagnation - characterized by low rates, low growth and low return outlooks - will lend support to growth stocks and long-duration assets. Nonetheless, if 2020 has taught us anything, it is humility. It remains important to diversify across style factors.
8. A thematic approach can help to uncover long-term growth
In a low-growth world, a thematic approach can help identify genuine long-term growth opportunities. The coronavirus crisis has accelerated some key themes, especially the digital transformation of the economy, while also showing how these themes transcend regions and sectors. We believe thematic investing is about finding quality companies exposed to secular growth themes: it must be driven by in-depth research, especially when large-cap growth stocks are trading at such stretched valuations.
Alternatives: resilience for growth, nimbleness for value
9. Resilient growth will be in favor but it won’t come cheap
We have seen the coronavirus crisis accelerate the trend for private equity to favor businesses with resilient growth prospects and executable plans to add value. This translates to favoring sectors such as software, technology and health care. By region, it manifests as a tilt toward growth markets such as China. Valuation is the biggest risk in our view, which will likely need to be mitigated by implementing significant strategic and operational improvements to accelerate potential earnings growth.
10. A continuing role for opportunistic and idiosyncratic strategies
Next year will likely bring an unusual mix of early- and late-cycle dynamics, and ongoing pandemic and policy questions. Any resulting volatility or uncertainty is likely to create windows of opportunity for liquid strategies such as equity long/short, distressed and short-term trading strategies, but also for less liquid strategies such as private equity secondaries, opportunistic credit and structured equity. Idiosyncratic and uncorrelated strategies such as insurance-linked securities and macro trading could help lend stability to portfolios during any periods of increased volatility.
These 10 themes are discussed in more detail in the Solving for 2021 White Paper.
Joseph V. Amato is President and Chief Investment Officer, Equities; Brad Tank is Chief Investment Officer, Fixed Income; Erik L. Knutzen is Chief Investment Officer, Multi-Asset Class; and Anthony D. Tutrone is Global Head of Alternatives at Neuberger Berman, a sponsor of Firstlinks.
This material is provided for general informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. You should consult your accountant, tax adviser and/or attorney for advice concerning your own circumstances.