The outlook for markets in 2021 among investors and analysts is easy to describe: cautious optimism.
Almost universally, fund managers believe the year will bring a rebound in economic activity, supporting assets that have already soared in value since the depths of the pandemic crisis in March, but also lifting sectors that had been left behind. Bond yields are expected to stay low, lending further support to stock valuations.
But the virus mutation found in the UK, which caused a brief wobble in markets late this month, highlights how it is not always smooth sailing.
We asked investors: what can go wrong?
The answers below have been edited for clarity and length.
Howard Marks
co-chairman, Oaktree Capital management
Rising interest rates, unlikely as they are in the intermediate term, are the main threat.
Today’s high asset prices are highly dependent on low interest rates for their appropriateness. If rates were to rise, asset prices would probably fall. However, there’s little reason to believe rates will rise in the short run because there doesn’t seem to be much inflation, and I believe the Federal Reserve isn’t concerned about inflation.
Valentijn van Nieuwenhuijzen
CIO, NNIP
I don’t think central banks will have to look through inflation, because I don’t think there will be any. If I’m wrong and it does accelerate, that’s a meaningful game-changer for markets.
It would mean that a lot of losers in markets that have been left behind could really catch up — think of banks and financials, but also the broader value factor that has suffered secular underperformance over the past decade. Growth stocks would suffer from rising interest rates. They might still rise but less than value. And obviously government bonds would suffer.
Everybody has the same benign outlook. That’s also a risk. We will be monitoring closely to see any concerning concentration in positions.
Sam Finkelstein
Co-CIO of global fixed income, Goldman Sachs Asset Management
Fixed income investors face two key risks entering 2021.
First, the extraordinary Covid-19 policy response has extended the challenge of low yields. Second, central banks have limited policy ammunition in the event of a negative growth shock. This backdrop sharpens our focus on constructing balanced portfolios that are resilient to bouts of market volatility.
Vincent Mortier
Deputy CIO, Amundi
The recent market rally is based on blind faith in the vaccine and on the brave assumption that very soon, everything will revert to as it was before, or even better. This is a risk: producing and distributing these vaccines on such a large scale won’t be a walk in the park.
Fiscal and monetary support are keeping economies afloat, but only just. These measures are getting harder to implement. Expect more monetisation of debt and increased pressure on central banks — any withdrawal of…
Read More: What can go wrong? Investors’ views on the big risks to markets in 2021