2021 Outlook and Forecasts Across the Investment Portfolio
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.
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.
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 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.
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.
IMPORTANT INFORMATION. For Asia-Pacific markets, this information is directed to institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. Northern Trust and its affiliates may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, and its accuracy and completeness are not guaranteed. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor. Opinions and forecasts discussed are those of the author, do not necessarily reflect the views of Northern Trust and are subject to change without notice.
This report is provided for informational purposes only and is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. Information is subject to change based on market or other conditions.
Forward-looking statements and assumptions are Northern Trust’s current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information.
Past performance is no guarantee of future results. Performance returns and the principal value of an investment will fluctuate. Performance returns contained herein are subject to revision by Northern Trust. Comparative indices shown are provided as an indication of the performance of a particular segment of the capital markets and/or alternative strategies in general. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index. Gross performance returns contained herein include reinvestment of dividends and other earnings, transaction costs, and all fees and expenses other than investment management fees, unless indicated otherwise.
Northern Trust Asset Management is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Belvedere Advisors LLC and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.
© 2021 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A.