What to expect in 2021

Text transcript

Welcome to Soundbites: weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life.

For today’s Soundbite, we spoke with Lenny McLoughlin, chief investment strategist with Irish Life Investment Managers. The conversation covered a wide array of topics, including a recap of 2020 and the outlook for 2021.

Lenny McLoughlin (LM): In terms of longer-term outlook for investors, we believe equities will be the asset of choice. Over the medium to long term, we are expecting returns from equities of somewhere in the region of 5% to 6% per annum. That’s based on a strong growth cycle that we believe will be in place for the next number of years and, with that, improving earnings outlook.

Here he is on the short-term future for equities:

LM: Despite the turmoil that we’ve seen in equity markets, equity markets are up 12% year to date both in local currency terms and in Canadian dollars and are actually up about 60% from the March lows. Despite that, we still see upside of mid- to high-single digits in equity markets over the course of 2021.

Typically, when we exit recession and we move into the recovery phase of the cycle, as we’ve seen from March of this year, you get very, very strong returns in equity markets. However, as you transition into the growth phase, equity markets still typically tend to do well, and we expect that to be the case over the course of 2021.

In absolute terms, valuations for equity markets do look expensive when you look at things like P/E multiple. We are currently trading at a multiple of 19.9 times. The long-term average is about 15.7. When you look at things like dividend yields and price-to-book, equities do look expensive versus the long-term averages. However, when you compare equities to bonds and cash, equities do look very, very attractive given the low yields that are available in those assets. For U.S. equities, looking at the earnings yield gap in the U.S., it is suggesting the U.S. equity market should be trading at a P/E multiple of 27 times compared to the current level of 22, suggesting a 20%-plus upside in equity markets.

On bond markets:

LM: Bond markets have done well this year though we don’t expect the type of returns that we’re seeing this year to be repeated. But we do believe that yields generally will remain low for a number of reasons. One is that central banks have committed to maintaining low levels of interest rates over the next couple of years. And central banks have also committed to continuing ongoing levels of QE [quantitative easing] or asset purchases — and we believe that will help maintain yields at lower levels.

On global growth in 2021:

LM: The global economy has suffered a contraction in growth this year of about 4%. Looking into 2021, we believe that the global economy will grow by about 5% over the course of next year. The growth outcome will be determined by a number of things, one being the path of the virus; two being the level of stimulus that is provided both in the fiscal and the monetary side of things; and thirdly, probably more importantly, is the deployment of various COVID-19 vaccines over the course of next year. Now, I think the growth path through 2021 for the global economy can be split into three very distinct stages. I think the first quarter will see slower growth, with growth on an annualized basis for the global economy probably running somewhere in the region of 2% to 3%. As we move into the second quarter and third quarter of next year, however, we believe that we will see significant pickup in growth, somewhere in the region of 6% to 7% on an annualized basis. Now as we move into the latter part of the year, I think growth will begin to ease back a little bit again toward around 3%. But that will still be above the long-term trend growth for the global economy of about 2.5%. And, net-net, when you combine those things, that probably leaves growth for the global economy at around 5% next year.

And finally, on the investment impact of Brexit.

LM: I think the asset most sensitive to Brexit issues would be Sterling. Currently cable is trading about 1.31. I think if you get to a situation where you get a no-deal Brexit, I think cable would fall to about 1.25 to 1.27. And I think U.K. equity markets would also potentially fall, probably, no more than 5%. [As for] European equities, I think the fall there would be less. I think it would be somewhere in the region of 1% to 2%. In terms of the overall impact on global markets, I think it’s quite minimal — the reason for that is, while being a large part of Europe, the U.K. accounts for just over 2% of global GDP. I don’t think you will see any significant reaction in global equity markets as a result of this.

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Well, that’s today’s Soundbite, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Lenny McLoughlin, chief investment strategist with Irish Life Investment Managers.

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