Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 419

10 big ideas for 2021 - a midyear update

Editor’s Note: The full White Paper ‘Ten for 2021’ mid year update is available here. In this summary, we have extracted the first paragraph from each section on 'what we've seen'. The full paper contrasts this with what was expected in November 2020.

Last November, the heads of our four investment platforms identified the key themes they anticipated would guide investment decisions in 2021. With the year now half over, we revisited these concepts to see how they’ve played out thus far and assess our outlook for the second half of 2021.

Macro: The world after the coronavirus

1. A return to early-cycle dynamics - but no substantial reflation

We think inflation is likely to fall back, but we are more sensitive to upside risk than at the start of the year.

What we’ve seen: The big change since we met in November is the sheer boldness of U.S. President Biden’s fiscal plans. The $1.9 trillion American Rescue Plan was arguably baked into market expectations already, but there is a lot more to come. It’s unclear how much will survive the legislative process, but it seems likely to be the “significant continuing fiscal stimulus” that we thought necessary to generate structural rather than transient, low base-effect inflationary pressure.

2. Populism is here to stay

If anything, geopolitical tensions are up and economic policy is becoming more explicitly oriented toward social equality-related targets.

What we’ve seen: Accusations of “vaccine nationalism,” the frosty atmosphere at the first talks between China and the new U.S. administration in Alaska in March, and a hawkish NATO communiqué in June leave little doubt of the abiding and growing frictions in geopolitics and global economic relations. The U.S. has rejoined a number of multilateral agreements and institutions, as expected, but diplomatic efforts such as the end of the 17-year Airbus-Boeing trade dispute appear to be just as much about shoring up traditional alliances against China.

3. Accelerated digital transformation puts down roots

Evidence of longer-term investment in more and more sectors continues to build.

What we’ve seen: Evidence of a desire to continue working from home after the pandemic is mixed. 99% of 227 human resources leaders surveyed by Gartner during its Workplace Re-Opening Amid Vaccine Rollout webinar in March 2021 said that at least some of their workforce would be ‘hybrid’ after the pandemic, with 42% anticipating a majority to adopt hybrid working. Of the 4,264 employees in Gartner’s January 2021 Hybrid Work Employee Survey, 84% prefer remote or hybrid over onsite working, and more than half said that inflexibility from their employer would make them consider changing jobs. U.K. workers: a year in the pandemic, a Deloitte survey published in April, suggested that twice as many workers would like to work from home all or most of the time, compared with pre-pandemic. The same survey indicated that more than a third of under-35s felt ‘overwhelmed’ by working from home, however, and other studies appear to find a similar desire to get back to the office among younger employees, often for the social and career-advancement benefits. Policy statements from major employers are also mixed, with most appearing to embrace some kind of hybrid arrangement.

4. Supply chains become shorter and more diversified

Business leaders appear to be moving supply-chain resilience and transparency up their agenda, and not just in the semiconductor industry.

What we’ve seen: While it is too early to say how profound and lasting these forces will be, we are seeing new effects on supply: this year’s semiconductor shortage appears at least partly due to U.S. auto manufacturers shifting away from mainland China’s suppliers, for example. Rising demand and national security concerns are leading to large commitments to domestic production. U.S. President Biden has pledged $50 billion to the cause as part of his administration’s infrastructure spending proposals. Intel has committed $20 billion to build new fabrication facilities in Arizona. TSMC and Samsung have multibillion-dollar plans for new U.S. production capacity in Arizona and Texas, respectively. The European Union will use its pandemic response fund to target a doubling of its semiconductor manufacturing by 2030. South Korea has recently earmarked $450 billion for advanced chip manufacturing, India is offering more than $1 billion to companies that set up chip manufacturing facilities there, and chipmaking is a key element of China’s latest Five-Year Plan.

Fixed income: static yields, volatile currencies

5. Low yields and flat curves demand opportunism in credit markets

Flexibility and a tactical approach across the full range of credit markets has been a key source of return opportunities.

What we’ve seen: The mix of early- and late-cycle characteristics has arguably been clearest in fixed income markets so far this year, where a rapid, 80-basis-point rise in U.S. Treasury yields in the first three months left credit markets virtually unscathed. Spreads in both investment grade and high yield markets actually tightened as investors scrambled to offload interest rate risk. Tighter spreads do increase the need to seek out some extra capital appreciation through tactical allocation, however - and attractive opportunities have arisen.

6. Macroeconomic dynamics will be expressed through currencies

Currency markets have been subdued and Treasury yields have been the big story so far this year.

What we’ve seen: While central banks do appear to have stabilized real yields during the first few months of the year, they could not prevent a run-up in longer-dated nominal yields and therefore a rapid rise in bond market inflation expectations. That run-up in yields coincided with a New Year rally for the U.S. dollar and a continuation of the secular decline in currency market implied and realized volatility. That said, the decline in credit-spread volatility has been still more pronounced, and alongside the quietness of the majors there have been a number of mini-cycles in emerging markets currencies, as well as some unanticipated strength in the renminbi.

Equities: cyclical opportunities, long-term themes

7. Secular growth stocks ultimately prevail over cyclical rallies

We still expect the shadow of secular stagnation to help growth stocks eventually, but current dynamics could extend beyond this year.

What we’ve seen: As we expected, given the very strong early-cycle flavor of so much of the economic data, cyclical stocks have pulled ahead of both defensive and growth stocks so far this year. What has surprised us is the sheer strength of the economic data and the speed with which value stocks have re-priced: by mid-June, returns to U.S. large-cap value were more than twice those to U.S. large-cap growth.

8. A thematic approach can help to uncover long-term growth

Long duration and strong performance in 2020 have caused thematic stocks to lag the market.

What we’ve seen: While we would have acknowledged, at the end of 2020, that base effects would ensure that the world was unlikely to be “low-growth” over the next 12 months, the extent to which it has turned out to be high-growth has surprised us. The corollary to that has been marked outperformance by value and cyclical stocks. Moreover, stocks associated with portfolio strategies focused on secular, technology-related themes such as next generation connectivity and mobility have tended to underperform growth indices as well as value indices, in some cases due to the duration of their earnings expectations and in others due to the strong performance they experienced during the height of the pandemic crisis.


Register here to receive the Firstlinks weekly newsletter for free

Alternatives: resilience for growth, nimbleness for value

9. Resilient growth will be in favor - but it won’t come cheap

Evidence of the quality-growth tilt in private equity portfolios continues to build.

What we’ve seen: The sector tilt of global private equity deals continues to favor traditionally higher-growth industries: according to Preqin, over the 12 months ending in April 2021, 48% of deal value was in information technology and health care, relative to a weighting of 36% for those sectors in the MSCI World Index. We see this tilt to higher growth in our own co-investment programs. During the first six months of 2021, and including investments still pending, 65% of the companies to which we committed co-investment capital were projecting annual revenue growth of 10% or more; six years ago that proportion was just 26%. When we look at earnings growth projections, which tell us more about opportunities for profit-boosting operational and strategic enhancements, we see even greater ambition: 83% of the companies we have invested in this year project EBITDA growth of 10% or more.

10. A continuing role for opportunistic and idiosyncratic strategies, liquid and illiquid

The year has started well for liquid alternatives strategies, particularly those reflecting themes of inflation, the value equity comeback and the search for yield.

What we’ve seen: The market dynamics described under theme numbers 6 and 7 - the sell-off in Treasuries, the up-then-down trends in the dollar, the complex push-and-pull between equity styles and sectors - provided a rich opportunity set for trading strategies and other liquid alternatives. Just as important, we believe they are also a reminder of how important it is to seek out new sources of diversification when Treasury yields are so low and inflation expectations are rising, rendering the traditional portfolio hedging asset potentially much less effective.

 

The full White Paper ‘Ten for 2021’ mid-year update is available here with more details on each of the above categories. Contributions include from:

  • Joseph V. Amato, President and Chief Investment Officer - Equities
  • Erik L. Knutzen, CFA, CAIA, Chief Investment Officer - Multi-Asset Class
  • Brad Tank, Chief Investment Officer - Fixed Income
  • Anthony Tutrone, Global Head of Alternatives

This article is general information and does not consider the circumstances of any investor. Neuberger Berman is a sponsor of Firstlinks. This material is general information and does not constitute investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. You should consult your accountant or tax adviser concerning your own circumstances.

For more articles and papers from Neuberger Berman, click here.

2 Comments
Jim Daly
August 10, 2021

The leaders surveyed about working from home obviously don't include workers from certain categories; for example, creative industries, performers who require audiences and audiences who require (crave?) performers; educators, hands-on health workers, tour operators, face-to-face hospitality, manual workers of all kinds. One might question the seemingly reflex 'selectiveness' of what constitutes work. Philosopher Bertrand Russell, who was the recipient of a massive fortune in his relatively young years and never worked a day in his life - in a sense - defined work as 'moving stuff'. Such movement includes moving brains, eyes and ears over a keyboard, admittedly, but even such movement as that relies on many others doing other kinds of movement, like listening and looking for a cue to enter the scene on a live stage, pulling a lever on a metal-turning machine, slipping mail into a post-box, wiping tables. You get the picture. Do not neglect those of our fellows who do this movement stuff beyond and for the keyboarders. To do so shows a snobbish, removed attitude, or mere ignorance of the real world. Not a promising assessment of business leadership.

Jack
August 05, 2021

I can't see how what you call 'supply-chain resilience' cannot lead to higher inflation. Companies in the past relied on cheap stuff from China arriving as they needed it, keeping storage and inventory and warehouse costs down. Now they need to buy and store stock and have it sitting around. It's a new way of doing business that costs more. The end of the dreaded word, transitory.

 

Leave a Comment:

     

RELATED ARTICLES

Two courageous responses to the Retirement Income Review

Life and death restarting the Australian economy

banner

Most viewed in recent weeks

Stop treating the family home as a retirement sacred cow

The way home ownership relates to retirement income is rated a 'D', as in Distortion, Decumulation and Denial. For many, their home is their largest asset but it's least likely to be used for retirement income.

Welcome to Firstlinks Edition 433 with weekend update

There’s this story about a group of US Air Force generals in World War II who try to figure out ways to protect fighter bombers (and their crew) by examining the location of bullet holes on returning planes. Mapping the location of these holes, the generals quickly come to the conclusion that the areas with the most holes should be prioritised for additional armour.

  • 11 November 2021

Welcome to Firstlinks Edition 431 with weekend update

House prices have risen at the fastest pace for 33 years, but what actually happened in 1988, and why is 2021 different? Here's a clue: the stockmarket crashed 50% between September and November 1987. Looking ahead, where did house prices head in the following years, 1989 to 1991?

  • 28 October 2021

Why has Australia slipped down the global super ranks?

Australia appears to be slipping from the pantheon of global superstar pension systems, with a recent report placing us sixth. A review of an earlier report, which had Australia in bronze position, points to some reasons why, and what might need to happen to regain our former glory.

How to help people with retirement spending decisions

Super funds will soon be required to offer retirement income strategies for members in decumulation. With uncertain returns, uncertain timelines, and different goals, it's possibly “the hardest, nastiest problem in finance".

Tips when taking large withdrawals from super

You want to take a lump sum from your super, but what's the best way? Should it come from you or your spouse, or the pension or accumulation account. There is a welcome flexibility to select the best outcome.

Latest Updates

Interviews

John Woods on diversification using asset allocation

All fund managers now claim to take ESG factors into account, but a multi-asset ethical fund will look quite different from a mainstream fund. Faced with low fixed income returns, alternatives have a bigger role.

SMSF strategies

Don't believe the SMSF statistics on investment allocation

The ATO's data on SMSF asset allocation is as much as 27 months out-of-date and categories such as cash and global investments are reported incorrectly. We should question the motives of some who quote the numbers.

Investment strategies

Highlights of reader tips for young investors

In this second part on the reader responses with advice to younger people, we have selected a dozen highlights, but there are so many quality contributions that a full list of comments is also attached.

Investment strategies

Four climate themes offer investors the next big thing

Climate-related companies will experience exponential growth driven by consumer demand and government action. Investors who identify the right companies will benefit from four themes which will last decades.

Investment strategies

Inflation remains transitory due to strong long-term trends

There is momentum to stop calling inflation 'transitory' but this overlooks deep-seated trends. A longer-term view will see companies like ARB, Reece, Macquarie Telecom and CSL more valuable in a decade.

Infrastructure

Infrastructure and the road to recovery

Infrastructure assets experienced varying fortunes during the pandemic, from less travel at airports to strong activity in communications. On the road to recovery, what role does infrastructure play in a portfolio?

Economy

The three prices that everyone should worry about

Among the myriad of numbers that bombard us every day, three prices matter greatly to the world economy. Recent changes in these prices help to understand the potential for a global recovery and interest rates.

Shares

Why green hydrogen is central to achieving net zero

Hundreds of green hydrogen projects show this energy opportunity is finally being taken seriously. While a cost disadvantage and technical challenges need to be overcome, it promises to deliver a path to net zero.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.