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Remarkable, painful, unsettling, hopeful… 2020 brought a roller-coaster ride of emotions, not to mention economic and market volatility. As the end of the year approached, the global economy was on its way to climbing out of the deepest hole ever. Markets, meanwhile, had moved forward, mostly on the strength and relative safety of US equities, growth stocks, gold, and fixed income, and then taken a baby step toward cyclical leadership at the end of the year. So, with the US election behind us (though court challenges, recounts, and Senate runoff elections are still to come as of this writing), COVID-19 cases spiking in Europe and the US, fiscal stimulus on hold in the US, and very encouraging vaccine data being announced, what is the investment thesis for 2021?
Over our 12-month horizon, we think vaccine news, reopening economies, and still-strong policy support will predominate and mark a turning point in the market narrative. Seeing a surer path to a safe and effective vaccine, we are more confident in an economic recovery in 2021 from still very depressed levels (see Figure 1 in PDF available below) and think this will be the catalyst for value to outperform growth, as well as for sovereign rates to rise somewhat. We expect a range of value-oriented exposures to outperform, including non-US developed market equities (versus US equities); emerging markets (EM); cyclical sectors such as financials, consumer discretionary, materials, and industrials; and smaller-cap equities. In sync with these views, we see the US dollar weakening too. Given large output gaps and low levels of valuations, sentiment, and positioning in these areas, we think a rotation will be an…
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