Investment outlook for 2021

Investors experienced an interesting 12 months in 2020. To recap:

• we experienced the worst recession since the Great Depression
• stock markets lost a third of their value in four weeks as the global pandemic and lockdowns hit in March
• then markets rebounded and stocks regained their previous highs in less than six months
•  this was followed by a few months of relatively subdued performance until November
• then markets raced ahead again following the US election results and encouraging news on Covid-19 vaccines.

If you don't have nerves of steel, this roller-coaster ride may have been disconcerting. But you shouldn't let that deter you from the markets. It might help put your mind at ease to examine the underlying reasons for the ups and downs.

Two key factors drove the faster than expected market recovery in 2020¹:

In response to COVID-19 restrictions which ravaged economies, governments committed huge sums of money to support businesses and individuals that lost income. Central banks also acted quickly to deliver bold policies to help stabilise economies and financial markets.

This combination prevented a prolonged global economic slowdown and sparked the rapid market rebound. It is important to note that investment markets are forward-looking – priced based on future earnings. As such, markets always lead the economy in the recovery phase.

Lockdowns in 2020 accelerated the shift towards the digital economy and boost tech profits. This created an important investment trend with a divergence between digital economy stocks and cyclical sectors like materials and energy. Digital economy stocks ended last year up more than 40% while cyclical stocks were down 10%.

Increased profits from tech firms like Apple, Amazon and Microsoft, which make up a large proportion of stock market indices, was key to driving broad market gains since March 2020.

There is a renewed confidence for economic growth in 2021, but we still need to tread with caution. Following the rally at the end of 2020, HSBC Asset Management expects investment returns to be more muted for 2021¹ :

The strength of the global recovery through the third quarter of 2020 surprised many. But the global recovery is now flattening out. Further gains will be harder to achieve and economic activity will remain below where it was at the end of 2019 - except in China.

We are in the "restoration economy" phase. The rate of this restoration depends on where you are in the world, on the vaccine(s) and on policy support. The good news is that COVID-19 vaccines look likely to become widely available through 2021, although at different times for different countries.

While continued policy support is expected, governments look unlikely to take on more debt. Central banks will probably shoulder much of the burden in stimulating economies. This could mean low interest/financing rates continue for the foreseeable future.

Continued economic recovery should support company profits. We think it makes sense to continue favouring equities. But new developments should guide regional allocation of your portfolio. A faster vaccine, for example, will benefit underperforming markets from 2020 including Europe, Latin America and Southeast Asia.

With a clearer picture of what to expect this year, the question is then: where do you invest your money to take advantage of potential opportunities? Here are 5 ideas we think should factor into your investment strategy going forward.

Asia has better recovery prospects compared to most economies, due largely to a few catalysts that could drive growth higher. In particular, China's five-year plan focuses on targeting the middle class and increasing the country's internal technological capability, while opening its capital markets wider to outsiders.

The Regional Comprehensive Economic Partnership (RCEP), a trade deal involving 15 Asia-Pacific countries that together represent over 30% of global GDP, is also likely to stimulate trade and activity in the region, while creating exciting new supply chains in ASEAN.

HSBC Asset Management is Overweight on China, Singapore and South Korean equities.

With the recent rollout of vaccines, hopes are high that national economies might soon return to some semblance of normality. This will be great news for cyclical sectors which depend on a strong economy to be profitable.

It seems likely vaccines will be widely available by mid-late 2021. Based on that assumption, we believe the industrial sector, materials sector and consumer discretionary sector all have potential to benefit from an upswing in consumption. Of course, there may be bumps that could hamper a smooth vaccine rollout.

HSBC Asset Management favours cyclical sectors focusing on high-quality companies with the financial strength to weather short-term volatility, which could include further waves of the virus.

Technology companies have outperformed thanks to the much-acknowledged acceleration in digital consumption as people stayed home. Once the pandemic is over, tech is expected to carry on performing well.

We believe the 2020 boom in tech uptake is structural, and will therefore continue to permeate supply chains, commerce, healthcare, media consumption, communications and other areas.

Technology companies from emerging markets may present especially interesting opportunities. Their exciting growth potential often comes with more attractive valuations.

In 2021, we believe a potent mix of catalysts will help to establish sustainable investments more deeply into the mainstream, while also pushing them higher longer-term. Newly elected US President Joe Biden has promised a USD2 trillion green energy and infrastructure plan; however, there's some uncertainty if it will pass the US Congress. Meanwhile, China has committed to achieving carbon neutrality by 2060.

Find out more about our take on sustainable investing.

HSBC Asset Management believes sustainable investments should be a cornerstone of investor portfolios in 2021. The commitments to sustainability from the world's two largest economies will benefit companies exposed to a wide range of markets, from electric vehicles to renewable energy, infrastructure and more.

With returns on high quality bonds expected to stay ultra-low for some time, it's possible to argue that they won't offer as much protection as normal in an investment portfolio. As such, gold is a good alternative.

Its strong relationship to real interest rates should also offer protection against positive inflation surprises. Much uncertainty still persists, including Brexit risks, geopolitical uncertainty and the long-term effectiveness of the coronavirus vaccine.

HSBC Asset Management thinks gold will continue to be an important portfolio diversifier in 2021.

To find out more about how the economic and investment landscape is shaping up for the rest of this year, and how you could take advantage of potential opportunities, speak to your Relationship Manager today.