Developed Non-U.S. Equity Outlook

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The Pandemic and Politics Color the Outlook for Global Equities

The efficacy of COVID-19 vaccines will determine the speed and slope of a global recovery.

In a best-case scenario, drug companies would make effective vaccines widely available globally by late first quarter or early second quarter. This would boost consumer confidence and lessen the need for further economic restrictions. A risk to this scenario includes another prolonged wave of the pandemic that forces more shutdowns and dampens economic activity. The incoming Biden administration has promised to aggressively combat the virus, making stricter stay-at-home orders a possibility if the pandemic isn’t brought under control or vaccines don’t prove to be effective. Effective vaccines should benefit previously hard-hit industries such as travel and aerospace, where we are seeing some companies with potential upside. We would expect to see a rotation into these areas from the more defensive firms with recurring revenue, which saw a huge run-up during the lockdowns.

U.S. politics may yet affect the future of equity markets.

A smooth transition for the Biden administration remains uncertain. We are also closely watching the U.S. Senate runoff elections in Georgia in early January. A belated “blue wave” would make it easier for President-elect Joe Biden to implement campaign policies, such as higher corporate taxes, more regulation, green initiatives and infrastructure spending. Conversely, a Republican-controlled Senate could continue gridlock and prevent Biden from achieving much of his agenda. We expect to see more fiscal stimulus, which could benefit consumer-facing sectors. Conversely, the potential return of industry regulations relaxed under the Trump administration would likely have negative impacts on corporate earnings and equity prices.

We expect the rotation from large-cap to small-cap companies to continue.

Small-cap stocks, in general, are at lower valuations on a historical basis and tend to outperform large caps in the early stages of economic recovery. We also believe they operate better in less efficient markets, creating opportunities for active managers to add alpha.


The Case for Emerging Markets Remains Solid into 2021

EM equities look attractive as the world recovers from the pandemic.

We think a global cyclical recovery, boosted by positive vaccine news, supports global equities as the world emerges from this health crisis. EM countries have put the worst of COVID-19 shutdowns behind them. Economies are gradually reopening, and earnings are recovering. Economic growth rates and earnings growth rates remain greater in emerging markets—and valuations remain attractive—relative to developed markets. In our view, improving Purchasing Managers’ Index data, recent earnings revisions and ongoing central bank accommodation support this positive outlook.

We expect reduced geopolitical risk.

While we note President-elect Biden’s tough words for China on the campaign trail, we expect improved relations between the U.S. and China. The new administration is likely to take a more deliberate and multilateral approach to trade. In that case, U.S. trade policies will likely become more predictable, thereby lowering tensions and potentially benefitting EM stocks.

Central bank policies support EM.

Central banks around the world remain extremely accommodative. Fed policies should help keep the U.S. dollar (USD) relatively weak. Rate cuts chip away at the USD’s yield advantage, while ongoing fiscal stimulus increases U.S. current account deterioration. Historically, a weaker USD has been supportive of EM economies and currencies and there has been a strong negative correlation between the USD and EM equities.



Q1 2021 Investment Outlook Resources

References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.

International investing involves special risk considerations, including economic and political conditions, inflation rates and currency fluctuations.

Alternative mutual funds that hold a variety of non-traditional investments also often employ more complex trading strategies than traditional mutual funds. Each of these different alternative asset classes and investment strategies have unique risks making them more suitable for investors with an above average tolerance for risk.

Diversification does not assure a profit nor does it protect against loss of principal.

Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.

Mutual fund investing involves market risk. Investment return and fund share value will fluctuate. It is possible to lose money by investing in mutual funds.

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