- 2021 will see a ‘repair’ of the deep Covid-19 damages, with the economy set to rebound strongly as society normalises into summer.
- But there is much to despair about. Potential growth will be lower out of this crisis. Employment will recover more slowly and Covid has fanned inequalities. Investors can also lament about the fall of future investment returns.
- Falling policy uncertainty has compressed risk premia into the turn of the year. This process has legs, and more so as investors face a new certainty: going forward, fixed income returns will be mediocre. This will support risk taking.
- The revised central bank strategy creates a new investment paradigm: lower rates volatility, stretched cross-asset valuations, more frequent corrections and lower diversification benefits. More than ever, hedging strategies matter.
- We start the year with an overweight on equities, and a bias towards Cyclical and Value styles. The dollar will depreciate further, if less fast. EM currencies and equities offer good value. We stay long Credit, but less so. 2021 will not be a smooth ride; views are turning consensual, and extreme positioning may develop into spring. Use Q1 to build hedges.