#Market Strategy — 05.01.2021

Vaccines, recovery, and reflation

Investment Themes 2021



2021 vs. 2020 will likely be the year of Recovery vs. Recession, Vaccine vs. Virus, Reopening vs. Shutdowns, Reflation (moderate) vs. Deflation, and Dollar Weakness vs. Strength. Monetary policy will remain easy and fiscal policy accommodative. Early cycle investing means balancing portfolio allocations: Non-US equities vs. US equities, Small-/mid-cap equities vs. Purely large caps, Cyclical vs. Growth shares, Non-Dollar currencies vs. the US dollar (for USD investors). Base metals, Precious metals, Inflation-linked bonds, Infrastructure and Real estate stand to profit from this new economic cycle.  


A cross-asset theme: Equities, Bonds, Foreign Exchange.

  • Focus on ‘early cycle’ sectors such as Construction, Mining, Capital Goods, Materials, and selected consumer cyclicals.
  • Focus on mid- and small-cap equity exposure in Europe and the US.
  • Global infrastructure/renewable energy spend
  • Income: Inflation-linked bonds and Real estate income.
  • FX: Commodity FX vs. Low yielders, G-7 FX for USD investors.
  • Precious metals: gold and silver for all investors.
  • Base metals demand and EV-driven commodities demand.


Vaccine progress

With 11 drugs in large-scale Phase 3 trials, 18 in Phase 2 and 39 in Phase 1 at the time of writing, there will be ample news flow in late 2020/early 2021. The initial findings on Covid-19 vaccines were very positive, with many candidates achieving a higher-than-expected efficacy level, far above the average 50% for a flu vaccine. The FDA had set a 50% efficacy goal for emergency approval. Vaccines are key to reopening the economy in the medium term. Our base-case scenario is continued progress on vaccine development. Distribution, logistical challenges and consumer preferences will also determine the pace of success. 


A lower for longer monetary policy
and targeted fiscal policy


The world’s major central banks moved much faster than during the Great Financial Crisis as they unleashed the most broad-ranging and timely stimulus in financial history. A key event came on 23 March (and by no coincidence this was the day the second-fastest bear market in history ended) when the Federal Reserve (the Fed) announced the purchase of corporate debt for the first time. In addition, at Jackson Hole, the Federal Reserve outlined monetary policy, which will likely allow inflation (and therefore the economy) to run hotter for longer. The Fed will also continue to finance large deficits with low interest rates supported by quantitative easing. Global central banks’ assets are expected to grow to USD 27 trillion in 2022.

Finally, given the high unemployment rates, fiscal policy will remain critical but lessen in importance as vaccine progress accelerates and reopening begins. Structurally there is an increasing global emphasis on infrastructure with a ‘green’ focus in government spending. The three largest economic blocs, namely the EU, the US (with Joe Biden’s election) and China, are united in this regard. 


2021 vs. 2020: portfolio rebalancing from recession to recovery


2021 will likely be the year of Recovery vs. Recession, Vaccine vs. Virus, Reopening vs. Shutdowns, and Reflation (moderate) vs. Deflation, and Dollar Weakness vs. Strength. We forecast a cyclical recovery in the economy in 2021 as global growth expands from -4% to +5.2%. In addition, we forecast a moderate rise in inflation as we exit the deflationary conditions of the post-pandemic crisis. Early in the economic recovery, there will likely be a combination of gradually rising bond yields, a weaker dollar, higher equity markets, and cyclical sectors picking up in the economy. 

Higher yields and the Covid-19 vaccine are powerful catalysts to justify a ‘barbell’ allocation between growth and cyclicals, especially after a long period of outperformance by growth. For example, MSCI World Growth has outperformed the MSCI World Value Index by 75% over the last three years and nearly 38% in the last one. But we started to see Value outperform over September-November 2020, by more than 6% in November alone. The key from a portfolio allocation perspective is to have both styles, to broaden investors’ portfolio allocation.

Firstly, base metals have benefitted from a lack of capital investment over the past decade in oil and gas, and in mining sectors. Secondly, a gradual economic rebound will likely drive a cyclical rebound in demand in 2021. Thirdly, we favour certain 'green’ base metals such as copper, nickel, zinc and lithium that have structural growth in demand due to climate change and electrification.

In terms of market implications, it is important that investors adjust portfolio allocations to reflect the new economic environment. This means a portfolio balance between: Non-US equities vs. US equities, Small/mid-cap equities vs. Purely large caps, Cyclical vs. Growth shares, Non-Dollar currencies vs. the US dollar (for USD investors). In addition, Base metals, Precious metals, Inflation-linked bonds, and Real estate stand to profit from this new economic cycle. 



  • An earlier-than-expected withdrawal of easy monetary policy before an economic recovery takes hold.
  • Late cycle, large, unexpected defaults in the credit markets trigger a double-dip recession.
  • Vaccine failures, Vaccine caution, or Coronavirus resurgence hurt(s) consumption.
  • An insufficient targeted fiscal policy as an economic bridge before a broader distribution of vaccines.
  • An unexpected inflation increase in the absence of a recovery in economic growth, which would be detrimental to bonds and equities.
2021 Investment Themes

Our 10 Investment Themes for 2021