2020 was a challenging year that didn’t play by traditional playbooks. This year won’t be a year of a traditional cycle recovery – it will be a year of vaccine-led restart. The BlackRock Investment Institute sees three new themes driving markets in 2021.
After what’s likely to be a challenging first couple of months of the new year, we expect vaccine deployment to lead to an aggressive restart of economic and social life. This brings us to the first theme: the new nominal. We think inflation is going to begin to firm across the course of the year, and at the same time, central banks are likely to hold interest rates relatively constant. The combination of stronger growth and constant interest rates in the face of firming inflation is a positive backdrop for risk assets like stocks and credit.
The second theme is globalization rewired. Covid-19 has accelerated geopolitical trends, such as the rivalry between the U.S. and China and a rewiring of global supply chains. We see Asia as a distinct pole of global growth in 2021 and as an investment destination separate from emerging markets.
Lastly, the pandemic has led to turbocharged transformations of trends such as an increased focus on sustainability, rising inequality and the dominance of e-commerce. We think investors should barbell their risk exposures in 2021. One side of the barbell represents exposure to secular tailwinds such as the global technology sector, as expressed through an overweight to U.S. equities and the quality factor. The other side of the barbell represents exposure to cyclicality. A key differentiating factor for investors will be drawing a line between cyclical exposures that can outperform in the vaccine-led restart — such as U.S. small caps, high yield, broad emerging market equities — and those that face secular headwinds, such as European equities, Japanese equities and the value factor.
The bottom line is we believe investors need to rethink portfolio allocations in 2021. In the short term, we are overweight equities and like high yield for income. In the long term, we prefer inflation-linked bonds, sustainable assets and assets tied to growth in Asia.