2020 featured unprecedented shutdowns of economic activity, a fusion of monetary and fiscal policymaking, and a vote for new leadership in the US. 2021 will see us start to shift back to pre-pandemic norms while simultaneously accelerating forward into the post-pandemic future.

Renewed growth

We think the approval and rollout of a coronavirus vaccine by the second quarter, fiscal policymaking, and US voters choosing legislative gridlock will enable corporate earnings in most regions to recover to pre-pandemic levels by the end of the year.

We expect the more economically sensitive markets and sectors, many of which underperformed in 2020, to outperform in 2021. Our preferred areas include small- and mid-caps, select financial and energy names, and the industrial and consumer discretionary sectors.

A renewed hunt for yield

Low-interest rates and high government spending will persist, in our view, as policymakers attempt to mitigate the economic effects of pandemic control measures.

In the near term, with the threat of inflation low, we think investors can still find positive real returns in emerging market (EM) USD-denominated sovereign bonds, Asia high yield, and select “crossover bonds” with BBB and BB credit ratings. In the longer term, the combined threat of government spending going too far, or not far enough, means investors may need to prepare for heightened inflationary and disinflationary risks across regions.

A new, and renewable, future

The coronavirus pandemic has accelerated, rather than halted, most of the long-term trends already underway. We expect a world that is more indebted, more unequal, and more local to result in below-average long-term returns across traditional asset classes. But we believe investors do have the opportunity to earn higher returns by positioning for a more digital future across 5G, fintech, and healthtech, and for a more sustainable one in greentech.

New leadership

2021 will bring a different mix of US political leadership, and we think new market leadership will follow. We expect fiscal stimulus and more predictable foreign relations to support cyclicals, including industrials and mid-caps. Meanwhile, we also expect higher deficits to weaken the US dollar.

By Mark Haefele, chief investment officer at UBS Global Wealth Management