We expect positive returns across most markets in 2021, but they will be unlikely to reach the surprisingly robust levels of 2020. Our outlook and forecasts reflect the effects of the pandemic, which will still loom large as near-term growth will be muted by social distancing globally. But investors will take comfort in the high likelihood of major vaccination progress by mid-year that will make strong economic growth likely. We have positioned our global portfolio to take moderate risk.

Equities

The U.S. market fell 34% in 23 days on coronavirus fears in February and March. Since then it has recovered dramatically, hitting new highs with the help of central banks keeping interest rates low and government aid, as well as strong progress on vaccine development.

In 2021 we expect:

• More moderate, single-digit returns across regions including 4.9% in the U.S. and 6% in Europe.
• Robust economic activity with a spending surge from consumers, who will draw from savings built up during the pandemic.
• Elevated valuations (price-to-earnings) to be supported by increases in corporate earnings.

We are equal-weight equities across all regions.

Fixed Income

Bonds were hit hard by COVID-19’s arrival, which brought downgrades and defaults. Help from government and central banks helped bonds recover and spurred record issuance.

In 2021 we expect:

• High yield bonds to benefit from easy monetary policy, low interest rates and improving fundamentals.
• High yield bonds to return 4.9% and investment grade bonds to return 1.9%.
• Continued low interest rates, which may fall even more.

We are overweight to high yield bonds, with their ability to participate in equity gains and mitigate losses.

Real Assets

Real assets usually have some protection from falling global equities because the resulting lower interest rates support these interest-rate-sensitive asset classes. However, the global economic shutdown acutely and abnormally hurt these asset classes.

In 2021 we expect:

• Global infrastructure returns could be a positive surprise because of pent-up demand in hard-hit sectors such as railroads, pipelines and airports.
• Low valuations of global real estate and natural resources equities to cushion against further losses.
• Global infrastructure equities to return 4.7%, global real estate to return 5.1% and natural resources to gain 3%.

We are overweight to global listed (equities) infrastructure and equal-weight global real estate and natural resources.

Interest Rates

Low rates prevailed globally as the Fed and other central banks cut rates in response to the pandemic. U.S. interest rates remained among the highest for developed countries despite Treasury yields hitting record lows.

In 2021 we expect:

• Interest rates will remain low as central banks globally focus on helping their economies to recover from the pandemic and inflation remains missing
• The Fed will remain on hold and continue its use of tools like quantitative easing.
• The 10-year Treasury yield to gravitate towards 0.5% — down from the current levels (closer to 1%).

We are comfortable taking on interest rate risk by investing out the yield curve, in longer term debt.

Positioning the Global Portfolio

In this environment, we recommend a modest overweight to investment risk, tilted toward asset classes offering downside protection and which benefit from continued low interest rates. In order of conviction, these are: high yield bonds, listed (equities) infrastructure and investment grade bonds.

Download our full 2021 outlook research paper to learn more about our investment themes and forecasts.