Investment management firm Invesco expects 2021 will move towards economic normality, with strong economic and profit growth throughout the year.
“Given the apparent success of vaccine rollouts in the developed world, we believe the global economy will show solid growth in 2021, partly as a function of a rebound from deep recession, partly due to a gradual release of pent-up demand and also due to fiscal support, especially in the US. At the same time, we expect major central banks to continue providing generous support,” said Paul Jackson of Invesco in a report Monday.
Experts at the US-based company’s Global Market Strategy Office continue favouring cyclical assets, with indicators signalling that the global economic cycle is heading in the right direction, and that market sentiment has improved markedly since a year ago.
However, Invesco cites five factors that could potentially put pressure on cyclical assets:
- The risk that the pandemic doesn’t go away and economic disruption continues
- Collateral damage, particularly amid scaled-back government support to businesses and households, which could dampen the economic recovery
- An increase in inflation, causing central banks to tighten their monetary policy, which could bring the risk of market dislocations
- A potential change in correlation regimes, especially between equities and bonds, and the fact that markets have already priced in a lot of recovery
“Each of these could lead us to adjust our preferences, usually in a more defensive direction,” Jackson noted.
Over the next 12 months, Invesco’s GMS experts expect the best returns on equities, real estate, commodities and high-yield bonds. However, they are most optimistic on real estate as they believe that elevated REIT yields will mitigate against the upward pressure from bond yields.
While real estate may suffer a loss of demand for office and retail space as a result of COVID-19, the Invesco experts find the yields to be attractive, with a lot of bad news apparently already priced in and expect growth to resume as economies recover.
“Even if cash flows bounce less strongly than for equities, yields are high and we expect them to be stable,” Jackson said.
Conversely, they expect rising government yields to result in negative government debt returns and a near-zero return on investment-grade credit. Corporate high-yield is their favoured asset class among fixed income assets.
Invesco forecasts the 10-year US treasury yield will rise to 2 percent and that that consequently the US dollar will strengthen slightly.
“This suggests to us that some recent trends will continue, particularly the outperformance of value versus growth, and the weakness of gold and defensive fixed income assets. However, it also suggests that commodity prices may find it harder to advance from here, and that emerging market assets may face a headwind due to renewed doubts about the ability of emerging market countries to finance their debt burdens,” said Jackson.
(Writing by Brinda Darasha; editing by Seban Scaria)
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