Global investing in 2021 will be largely affected by the continuing repercussions of Covid-19 along with the expectations and realities of vaccines.
“As vaccines roll out, the return to growth will be the 2021 story, and much of that is already priced into markets,” said Jurrien Timmer, director of global macro in the global asset allocation division of Boston-based Fidelity Investments.
With world growth expected to return to positive territory in 2021 after contracting in 2020, international fund managers are anticipating a continuation of the nascent rotation in the stock market into some cyclical companies that lagged during the past few years as tech giants dominated, leading to more opportunities both geographically and in terms of industry sectors.
Some rotation is also expected from large cap to small cap in what Timmer called a “broadening of the tape” that frequently happens in the early stages of a recovery.
Darren McKiernan, senior vice president and portfolio manager at Toronto-based Mackenzie Investments, noted “the pandemic is still front and centre, and although there is light at the end of the tunnel it is not a straight line to universal vaccine distribution.”
“Fresh rounds of stimulus will likely be required,” McKiernan added.
More government stimulus in the U.S. will add to an already massive debt burden, and will therefore continue the downward pressure on the U.S. dollar that began in 2020, Timmer said. A weaker dollar is a positive for other global stock markets, particularly emerging markets, some of which are seeing their currencies strengthen and earnings growth improve.
“Emerging markets stocks have lagged the rest of the world for the last 11 years,” Timmer said, adding that “emerging markets [are] trading at the most attractive valuations relative to the U.S. in 20 years.”
In Asia particularly, he said, economic growth prospects are superior: economic output in China and Taiwan, for example, has fully recovered from Covid, but output in the U.S. and Europe is still 30% below previous levels.
Trade tensions continue between the U.S. and China, with the U.S. cracking down on business with some of China’s leading tech companies and President-elect Joe Biden not expected to take an easier line than his predecessor.
There are also signs of deterioration in troubled countries.
“We have zero to minimal weight in certain countries such as Turkey, South Africa, Saudi Arabia, Russia and Brazil,” said Matthew Strauss, vice-president, portfolio manager with CI Investments in Toronto. “These countries have limited growth momentum and face complex health, economic, financial and policy issues. We worry about how quickly regions like Latin America and Africa can recover.”
Ian Riach, senior vice president and portfolio manager, investment solutions, with Toronto-based Franklin Templeton Investments Corp., is increasing exposure to emerging markets equities while remaining neutral in Canada and overweight in the U.S. relative to the MSCI All World Index.
“Canada lacks exposure to mature companies in some growth areas like technology and health care,” Riach said. “The U.S. has one of the most diverse economies and stock markets. Although stock valuations have crept up, there are a lot of companies that cater to growing trends such as working from home and social distancing.”
While his interest is piqued by health care companies trading at attractive prices in Europe, and better-priced tech giants in Asia relative to those in the U.S., he continues to like prospects for U.S. stalwarts with positive momentum in the health care, consumer discretionary and technology sectors.
He said some companies in cyclical industries such as energy and related industries like steel and railways may play catch up as the economy recovers, which bodes well for Canada.
“In line with the expected cyclical recovery that we expect, we have started to add back a bit in Canada,” he said.
However, like Timmer, Riach is even more positive on emerging markets, especially Asia.
“Emerging markets have higher expected growth rates during the next several years and it’s prudent to get in ahead of time before the recovery starts hitting the headlines,” Riach said. “Emerging markets are not without risk but have made great strides during the last 10 years in terms of governance at the government and corporate levels. Valuations are attractive relative to other markets and growth prospects are higher.”
Europe will be affected by issues related to Brexit, and Riach said that although Europe may benefit by the recent deal, he is underweight in both Europe and the U.K.
“Valuations in Europe are attractive, but I’m less comfortable about the growth outlook,” he said. “Europe needs more fiscal stimulus and it won’t come as quickly as in North America. With so many countries involved in making a decision, it’s harder for policy-makers to coordinate.”