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Market Update
December 18, 2020

2021 Outlook - Executive Summary

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There is reason to be optimistic for 2021 – the global growth outlook is expected to be strong and may even surprise on the upside.

Investment returns are likely to be driven mainly by equities, indeed for the next several years, as the 30-year run of good fortune for bonds draws to a close.

The US Demographic Hill

In terms of country focus, the US looks particularly well placed for the medium term as it starts climbing the so-called ‘demographic hill’, where large cohorts within the population will be entering their prime earnings years over the next decade or two.

Specifically, 72M Millennials are in line to eventually take over from a ‘mere’ 65M Generation X-ers in due course.

Back to nearer the present, over the next year or so, above trend growth and low interest rates should also benefit from both broad commodity prices and non-US equities globally. As for valuations, while equities may currently appear rather expensive in absolute terms, they are much more reasonably priced, relative to the extremely low level of bond yields (high level of bond prices).

2021’s Potential Bumps

In terms of the many potential bumps to look out for next year, there is a risk that vaccine rollouts could fail in some way, perhaps due to an aggressive virus mutation.

Another risk is that while low bond yields do currently underpin equity markets at fair values, if inflation begins to creep up causing bond yields to rise, where then for equities?

Investor sentiment indicators are another worry sign. These are already extremely bullish for many equity markets. This counsels a degree of caution, as paradoxically overly bullish sentiment may be a contrarian signal that preludes a short-term sell-off.

However, one thing does seem almost certain - 2021 will be another highly eventful year.

Happy and healthy holidays!

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Market Overview.