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Insurance Multi-Asset Outlook — Is the market rotation the real deal or just a head-fake?

In their latest multi-asset outlook for insurers, Tim Antonelli and Danny Cook argue that a durable rotation from growth- to value-type equity exposures may be in the offing for 2021.

The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional or institutional investors only.

KEY POINTS

  • Encouraging COVID vaccine data, government policy support, and gradually reopening economies make us more confident in taking a more pro-risk stance over our 12-month time frame.

  • Safe, effective vaccines could be one catalyst for a durable rotation from growth- to value-oriented equity exposures in the months ahead.

  • Within global equities, we prefer Europe, Japan, emerging markets (EM), and smaller caps, and think cyclical sectors are more attractive relative to growth sectors.

  • We believe interest rates will likely drift higher and find some credit spreads attractive relative to government bonds.

  • Downside risks include broad lockdowns as a result of a second COVID-19 wave, a spike in rates, and waning policy stimulus. Upside risks include another major dose of stimulus, particularly in the US.

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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