The “Global Insight 2021 Outlook” was produced by the Global Portfolio Advisory Committee within RBC Wealth Management’s Portfolio Advisory Group. The report offers an overview of major themes related to economics, financial markets, and investing for the upcoming year, 2021.
• All major economies seem set to reach their previous peak output levels much faster than they did following the global financial crisis. The continuation of ultralow interest rates should support higher stock prices while making fixed income investing more challenging.
• Equities should be the asset class of choice in 2021. We recommend holding an overweight position in equities.
• The COVID-19 economic damage should diminish greatly through 2021, while confidence in a return to a recognizable social and business landscape will likely grow. As GDP climbs back toward its pre-pandemic peak, corporate earnings, already recovering, could perform better than expected through 2021 and 2022.
• Stocks in the major markets have priced in some of this better earnings trajectory but not all. We expect equities could provide attractive all-in returns in 2021, and probably for 2022 as well.
• A greater return to normalcy such as that afforded by a successful COVID-19 vaccine could be a powerful tonic for equity market performance in 2021.
• The major global central banks will keep the stimulus pedal to the metal in 2021, but amid concerns policy tools are already nearing speed limits, look for policymakers to fine-tune current programs in order to deliver the most efficient and focused aid to support the economic recovery.
• What worked in the past to meet financial goals may not work in the future given the current low interest rate environment. We suggest splitting the roles of capital preservation and income generation in fixed income portfolios.
• High-quality bonds and cash-equivalent securities can add ballast to portfolios and act as a potential source of funds during periods of market volatility. These lower yielding positions can be offset by lower-rated and subordinated securities that provide higher yields in an attempt to maintain overall income and purchasing power.
• There seems to be greater acceptance of high government debt loads in the financial community and among government officials in the wake of the pandemic crisis. We believe higher debt loads are manageable in the near and intermediate term. However, high debt levels will eventually restrict governments’ budgetary flexibility and are likely to result in higher tax rates.
• High debt loads will likely also be a powerful incentive for policymakers to further suppress interest rates. This is a key reason we recommend that investors consider strategies for a low interest rate environment that may linger for much longer than one might think is reasonable.
• Inflation is experiencing a reflexive bounce back from weaker readings in the spring. Governments shut economies down and then turned them back on. Inflation is responding to the “turning back on” part. The Consumer Price Index (CPI) will likely bounce rather sharply in mid-2021 because of weak year-before readings. The CPI could be easily sitting around 2.5%, where we expect it will linger into the second half of next year.
• Before we see any potential for inflation to trend higher on a sustained basis we want to see the economy open more, more than it is. That’s especially true now that we are dealing with cross-currents of “second wave” shutdowns and vaccine optimism.