As noted in our macroeconomic outlook for 2021, the global economy has shown resilience in the wake of the pandemic shock. Unprecedented fiscal and monetary policies have provided substantial support to global economies, which continue to recover, but progress has been uneven. Further progress will be vulnerable to setbacks. Against this backdrop, our current tactical views on multi-asset allocation modestly favor growth assets in equities and fixed income, hedged by exposure to gold.
Just prior to the US election, State Street Global Advisors’ Investment Solutions Group incorporated a “governor” on the active risk exposure of its tactical portfolio. Given the clarity on US election outcomes, we have resumed the setting of standard active risk targets based on our models. Improving risk appetite has been informed by corporate earnings, which have been resilient, especially in the US where roughly 89% of companies have reported, and 86% of those have reported a positive earnings per share (EPS) surprise. In addition, consumers have been resolute, and strong manufacturing Purchasing Managers’ Indexes (PMIs) globally suggest broader recovery.
We therefore recommend a balanced exposure to risk assets, and our evolving Tactical Asset Allocation (TAA) weights reflect our baseline assumption of economic recovery (see Figure 1). Overall, we continue to favor global equities, credit, and gold, while becoming more sanguine on broad commodities. Real estate investment trusts (REITs) and core bonds look less attractive.
Our Market Regime Indicator is in a “Low Risk” regime as of this writing. Risky debt spreads have remained rather subdued, while implied volatility on both equities and currencies has eased meaningfully from recent highs. A low risk regime suggests investors are willing to seek risk and can lead equity markets to deliver favorable results. We have therefore recently increased our allocation to growth-oriented assets, both equities and broad commodities. Our forecast for global equities remains promising, as still-supportive macroeconomic and price momentum factors offset stretched valuations. In addition, the ongoing economic recovery has buoyed both sales and earnings sentiment.
In general, our evolving tactical asset allocation weights reflect our baseline assumption of economic recovery (see Figure 2).
Our outlook for equities continues to be cautiously optimistic, and we anticipate broader participation across regions. We still prefer US equities – our highest-conviction position – but now also hold modest overweights to non-US equities. Earnings and sales expectations remain strong for the US, while price momentum continues to help offset weaker valuations. To diversify this position, we recently increased our exposure to both European and Pacific equities in addition to increasing our US large cap overweight.
Within fixed income, elevated equity volatility and prospects for curve steepening have weighed on our return forecast for longer-dated bonds and suggest trimming of the duration of our overall portfolio.
Finally, from a sector perspective, we continue to support technology and consumer staples. Consumer staples appears attractive across all of the signals we evaluate, with the exception of momentum where we’ve witnessed some deterioration. Technology ranks above average for all factors except value, and the sector continues to deliver on earnings.
Consumer discretionary still looks good across momentum and sentiment factors, but its weaker scores for valuation, macro, and quality led us to a move away from the sector. Communication services has seen improving momentum and sentiment data, leading to an upgrade in our view.
We are cautiously optimistic on investment prospects for 2021. That optimism is reflected in our directional positioning, which favors equities over bonds, with recent increases in equities and commodities.
We expect growth to improve in 2021, but risks and uncertainty of course remain, including risk connected to the roll out of vaccines, and uncertainty related to policy under the Biden administration. In addition, although expectations for inflation have been muted so far, monetary accommodation will likely remain; inflation pressures could build and will need to be watched. Finally, near-term expectations for fiscal stimulus have improved, which would boost equities but could impact inflation. As the global recovery unfolds and the resiliency of global markets is retested in the months to come, we’ll be monitoring the evolving situation closely.
More on the Global Market Outlook
As the Pandemic Surges, Global Economies Will Be Tested Anew
Growth and Quality Assets Are Most Likely to Deliver on Earnings
Central Bank Action Will Support Investment Grade Credit
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Exp. Date: 12/31/2021