While volatility may be less elevated next year, financial markets and the economy could depend on Covid-19 developments, said Barclays in a new report, adding that it expects a growth rate of close to 5% in 2021.
The main question is over the pace of recovery and some areas of the economic landscape may change dramatically, the British bank said in its 2021 outlook report.
High government debt levels are a legacy to manage carefully and inflation is a risk to monitor, it added.
Turning to financial markets, in a world characterised by record low rates and high equity valuations, the five-year expected total returns on equities and bonds are likely to be lower than previously. Following the firepower unleashed by leading central banks this year, rates fell further into negative territory, weighing on prospective bond returns.
European and US high yield bonds, on a very selective basis and in the most resilient part of the market, may be worth considering, alongside US inflation-linked bonds, to hedge positive inflation surprises.
In equities, coronavirus is shuffling the cards, accelerating structural trends, the report said.
The rise of technology companies, aided by home working and online retail sales, reflects the attractions of growth. While valuations may deter some, equities seem fairly valued in the context of low rates.
“We are constructive on prospects for the asset class, preferring high-quality companies and an active approach,” Barclays said in the report.
“From a portfolio perspective, the pandemic showed the limitations of only relying on equities and government bonds. We see value in adding alternative assets such as private markets, gold or hedge funds to a portfolio to diversify and improve its risk-return profile.”
Another area of interest is sustainability, as pandemic recovery plans from governments have a sustainable bias. Companies too are being drawn to opportunities available, and potential growth prospects, from transitioning to a low-carbon world.
Similarly, including environmental, social and governance (ESG) considerations in asset selection can boost returns. The momentum behind investing sustainably, and with ESG considerations, suggests that increasingly investors agree.
