Eugene Philalithis, Head of Multi Asset Investment Management, Europe & Portfolio Manager, Fidelity Multi Asset Income fund range
What is your investment outlook for 2021?
Overall, we are cautiously optimistic on the investment outlook for 2021. The team expects periods of heightened volatility through the year, as markets respond to monetary and fiscal policy dynamics, and a range of political developments. However, as we have seen already this year, periods of volatility can create opportunities across asset classes.
Looking into 2021, our team prefers credit over equity risk and is focusing on assets higher up the capital structure. Credit, particularly on a risk adjusted basis, is likely benefit from loose monetary policy, due to a combination of bond purchases and the likelihood that interest rates will remain low as economies return to trend in terms of growth, inflation and employment.
We believe equities will continue to be supported by a combination of monetary policy (and potential further stimulus), a slower normalisation of real yields, and supportive fiscal policy (albeit with variation across global regions).
What do you think could surprise the market in 2021?
We believe the following trends could shape the markets over the coming quarters:
Inflation: The jury is out in terms of whether and how much inflation will rise in 2021. An important development this year is the Fed’s average-inflation targeting framework (FAIT), and the prospects for longer-term inflation will continue to influence investment decisions.
A new US presidential term: The economic implications of the US election will extend well into 2021. Given the importance of fiscal policy to the medium-term economic outlook, this matters for markets and poses significant risk. Overall, we see potential for a fairly volatile recovery path across asset classes.
Vaccine and pandemic induced behavioural changes are likely to be a significant driver of market volatility in 2021. Consumers have seen changes to every aspects of their lives, which is likely to have lasting implications for the economy.
What themes, sectors or regions would offer opportunities or potential risks in a post Covid-19 world?
We believe that equity markets face a fragile growth backdrop, but stimulus should remain supportive. From a risk-reward perspective, we expect decent compensation for high yield bonds and emerging market debt if the credit default cycle evolves in a moderately positive direction over 2021. Within high yield bonds, we prefer Asian securities, given stronger underlying credit fundamentals and strength of regional growth.
Inflation will remain an important theme for investors in 2021. We are watching the global macroeconomic backdrop closely to understand its trajectory over the year in order to remain flexible to any changes in this unfolding picture.
Given these considerations, the team will be drawing on our tactical asset allocation (TAA) toolkit to respond to changing market conditions. Alternatives also have an important role to play in well-diversified portfolios, and 2021 could provide plenty of opportunities for them to prove their worth.
How do you expect sustainability factors to influence returns and how is this reflected in your portfolio?
Embedded in Fidelity Solutions & Multi Asset’s assessment of global markets is our awareness that sustainability and ESG factors remain a critical element of investment risk. Unlike previous crises, the Covid-19 pandemic has disrupted far more than just asset markets: it has raised fundamental questions about the sustainability of industries, the responsibility of stakeholders and the long-term prospects for capitalism as we know it.