The road ahead for investors

December 05, 2020 | Kelly Bogdanova, Frédérique Carrier, and Jim Allworth


As we come to the end of a year unlike any other in memory, 2021 should bring a change in the narrative. Challenges certainly remain, but with the start of a new economic and investment era before us, we look at what investors can expect in 2021.


The passing of challenge-ridden 2020 can’t come soon enough. It’s time to look ahead.

As economies and corporate profits recover further, we believe ultralow interest rates should make equities the asset class of choice in 2021 while making fixed income investing more challenging.

Our team of specialists and strategists in the U.S., Canada, Europe, and Asia recently published the Global Insight 2021 Outlook, which sets forth RBC Wealth Management’s views on the economy, equities, and fixed income, as well as forecasts for currencies and commodities.

Importantly, the report addresses common concerns we often hear from investors, even more so since the onset of the COVID-19 pandemic:

  • Governments are now awash in debt, and there are no signs borrowing will let up anytime soon. Is more debt sustainable, and what are the risks for economies and taxpayers?
  • With the U.S. economy still in the process of reopening, where is inflation going from here and what can investors watch to gauge how price pressures may be building?
  • With interest rates near or below zero percent in many countries, it’s becoming more evident that what worked for fixed income investing in the past may not work in the future.

Following are highlights from the 2021 Outlook and links to each individual article.

The shape of things to come

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.

Beyond this period, we expect slower economic growth to restrain the overall growth of earnings and business values, resulting in an intensely competitive business environment. Slowing birth rates and protectionism will likely play a role. Investors should also consider the interplay of China.

In terms of long-term positioning, we think equity portfolios should be largely populated with the shares of those businesses for which there is high conviction that sales, earnings, and dividends can grow faster than the economy.

The debt dilemma

Public debt has ballooned since the COVID-19 pandemic began. For advanced economies, it now sits beyond what was reached after World War II, at greater than 120 percent of GDP. The debt picture is even more acute when off-balance sheet social promises are taken into account.

We believe higher debt loads are manageable in the near and intermediate term. Ultralow interest rates have actually pushed debt service costs down, including in the U.S., and this trend should persist in the next couple of years.

But as debt costs start to rise in the out-years, this will eventually restrict government budgets and services, and is likely to result in higher tax rates, in our view.

High debt loads will probably be a powerful incentive for policymakers to further suppress interest rates over the long term. Investors should consider strategies for a low rate environment that may linger for much longer than one may think is reasonable.

Inflation: To be, or not to be?

Inflation is bouncing back from weaker readings in the spring. Governments shut economies down and turned them back on. Inflation is responding to the “turning back on” part.

Before we see any potential for inflation to trend higher on a sustained basis we want to see the economy open more. That’s especially true now that we are dealing with cross-currents of “second wave” shutdowns and vaccine optimism.

In this article, RBC Capital Markets, LLC Chief U.S. Economist Tom Porcelli addresses a wide range of issues that could impact inflation both over the near and longer term.

Fixed income: Not dead, just different

Yields are set to start 2021 much lower than at the beginning of 2020, which is remarkable given that yields were already rather low a year ago. This makes the environment for reinvestment even more challenging.

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.

2021 investment stance

All major economies seem set to reach their previous peak output levels much faster than they did following the global financial crisis.

RBC’s annual real GDP growth forecasts (y/y)

Source - RBC Global Asset Management; November 2020

Major central banks will likely keep the stimulus pedal to the metal in 2021. But amid concerns policy tools are already nearing speed limits, we look for policymakers to fine-tune current programs in order to deliver the most efficient and focused aid to support the economic recovery.

For 12–18 months following the end of a recession there is usually very rapid catch-up corporate earnings growth. The persistence of ultralow interest rates should support above-average equity valuations. We recommend holding an Overweight position in equities.

This article includes our outlook for the equity and fixed income markets in the U.S., Canada, UK, Europe, and Asia, while also providing forecasts for currencies and commodities.

Required disclosures

Research resources

Non-U.S. Analyst Disclosure: Jim Allworth, an employee of RBC Wealth Management USA’s foreign affiliate RBC Dominion Securities Inc., and Frédérique Carrier, an employee of RBC Wealth Management USA’s foreign affiliate RBC Europe Limited, contributed to the preparation of this publication. These individuals are not registered with or qualified as research analysts with the U.S. Financial Industry Regulatory Authority (“FINRA”) and, since they are not associated persons of RBC Wealth Management, they may not be subject to FINRA Rule 2241 governing communications with subject companies, the making of public appearances, and the trading of securities in accounts held by research analysts.
In Quebec, financial planning services are provided by RBC Wealth Management Financial Services Inc. which is licensed as a financial services firm in that province. In the rest of Canada, financial planning services are available through RBC Dominion Securities Inc.