Global Conservative portfolio outlook, positioning, and attribution as of 12/31/2020
December 31, 2020
- We expect economic recovery and expansion to continue in 2021, amid ongoing U.S. consumer strength and business investment as COVID-19 vaccinations help release pent-up demand in certain parts of the economy.
- We anticipate positive equity market returns this year as rising earnings expectations for cyclical stocks should offset a likely decline in valuation multiples, which is typical early in a cycle.
- Sector allocation will be increasingly important in the U.S. in 2021, in our view, as the ongoing recovery and expansion drive a rebound in earnings for cyclical sectors and areas of the economy hardest hit by the pandemic, such as retail, travel, and leisure.
- Internationally, Europe already had a weak economy before the pandemic, in our view, and is now facing renewed pandemic lockdowns, while economic data has shown that Emerging Asia leads other regions in its economic recovery, which should support positive GDP and earnings growth in 2021.
- While risks remain, we anticipate more economically-sensitive equity sectors and regions will benefit from early-phase cyclical tailwinds as earnings growth rebounds with economic recovery.
- We anticipate Treasury yields could rise 50 basis points or more in 2021, driven by rising real yields and inflation expectations, though inflation should remain benign, given ongoing slack in the economy, while corporate spreads, in our view, should persist (or modestly compress) and, along with lower duration, help drive corporate bond outperformance.
- We have continued to shift away from the relatively defensive portfolio positioning in place at the start of the COVID-19 crisis, while seeking to balance opportunity against ongoing medical, political, and economic risks.
- Since late Q1 2020, we have increased exposures to more economically-sensitive areas of the markets, including adding to Emerging Asia exposure and establishing allocations to U.S. Financials, Industrials, Energy, and small cap equities; and we eliminated exposure to the large-cap U.S. Consumer Staples and Utilities sectors, which are less economically sensitive.
- We maintain an overweight of Emerging Asian equities, which provides exposure to favorable secular trends in the Information Technology, Communication Services, and Consumer Discretionary sectors, while we maintain an underweight to Europe and Japan.
- Within the fixed-income allocation, we retain an overweight to investment-grade corporate bonds and a shorter average duration than the benchmark to manage interest rate risk.
- U.S. Small-Cap Equities
- U.S. Corporate Fixed-Income Securities
- U.S. Treasury Securities
- U.S. Equities
- Long-Term Fixed Income
- European Equities