“Equities typically perform well overall during periods of increasing economic growth, so the trend still appears to be up for equities. We must remember, though, that the financial markets are naturally forward-looking and focus on what the world is expected to be like in 6-9 months. We should therefore assume that a significant share of the expected economic upswing in 2021 is already priced in by financial markets", says Lars Skovgaard Andersen and continues:
"Hence, the biggest equity price rises may well be behind us, even though we still expect equities have more to give over the next 12 months. Investors should also be prepared for periods of market turmoil and volatility along the way if, for example, the global economic recovery does not unfold as quickly as expected.”
He currently sees the highest return potential in emerging market equities, while sector-wise he sees the most attractive return potential in IT, industrials and commodities.
No celebration for bonds
In the world of bonds, an economic upswing can be expected to push inflation and long yields up – a trend we have already seen recently. This in turn means falling bond prices and thus an eroded return from bonds, which already provide only limited interest payments.
“While the accommodative monetary policies of the central banks, with low interest rates and massive bond purchases, may put a lid on how far yields can rise in the near future, the return potential from bonds is extremely limited, so we are maintaining our modest underweight here,” says Lars Skovgaard Andersen.
He currently sees the greatest return potential in more risky bond types, which would tend to benefit most from an economic upswing in 2021. More specifically, he points to emerging market bonds and high yield bonds, which are corporate bonds of low credit quality.
“That being said, during periods of market turbulence these bond types would also be the hardest hit, which is why investors should include other, more secure bonds in their portfolios, even though interest rates are lower here,” says the investment strategist.
This content is not investment advice - you should always speak to an advisor about how a possible investment matches your investment profile before making an investment.