Diminished recession risks, continued central bank support, Tempering of trade tensions, global economy to climb back to pre-crisis trend.
Risk assets will outperform but note elevated valuations
Allocation skew to EM, Japan and Europe ex UK
Maintain low cash position with overweight in High Yield and neutral on IG holding curve steepening positions
Before I get started, I love diverging charts. I can only assume that prior to 2008, the two measurements continued to track each other. I'll have to dig more into Yardeni's methodology. http://www.yardeni.com/pub/stmktfsmi.pdf
My allocation assisted by my budding AI driven Economic Environment Asset Allocation platform suggests real estate will outperform in 2021 followed by Emerging Markets Debt, EM Equity, US Equity, etc according to the chart below. I didn’t place real estate on top because it’s the focus of my next big project. It was what my platform said would perform the best considering the current economic environment and I didn’t disagree totally, but I do recognize headwinds in retail and office and the inherent risk associated with emerging markets.
JPM is positioning for a broadening recovery above trend growth
They “maintain a pro-risk tilt, spread across stocks and credit. We prefer cyclical equities and are overweight (OW) U.S. small cap, emerging markets (EM), Europe and Japan, and neutral on U.S. large cap and the UK. In credit, we temper our enthusiasm for U.S. corporate credit a little, and diversify credit holdings further with EM debt."
“left behind” sectors like travel and leisure to show new signs of life
Nuveen suggested that stocks are not expensive relative to other assets (chiefly government bonds), but are expensive relative to historical absolute levels.
They also believe Value, small and non-U.S. stocks (especially EM) outperform growth, big and U.S. stocks.
And that Financials appear very undervalued as they expect loan growth to resume, which should help the sector.
The World Bank – I skimmed the 234-page global economic prospects of the world bank and found https://www.worldbank.org/en/publication/global-economic-prospects
Global economy is expected to expand 4 percent in 2021 but still remain more than 5 percent below pre-pandemic projections.
EMDE growth is envisioned to firm to an average of 4.6 percent in 2021-22, the improvement largely reflects China’s expected rebound. Absent China, the recovery across EMDEs is anticipated to be more muted, averaging 3.5 percent in 2021-22
EMDE’s amid the economic disruption caused by the pandemic, historically low global interest rates may conceal solvency problems that will surface in the next episode of financial stress or capital outflows
A surge in debt without an increase in growth-enhancing investment projects is one of the factors that have led to debt crises.
Even by 2022, global GDP is forecast to be 4.4 percent below pre-pandemic projections, with the gap in EMDEs nearly twice as large as in advanced economies
The global economy headed into the COVID-19 pandemic after a decade of forecast disappointments and slowing potential output growth. The pandemic is expected to steepen the slowdown previously projected over the 2020s. However, ambitious policy reforms to support investment, improve education, and raise labor force participation could reverse much of the adverse impact of the pandemic on potential growth prospects over the next decade. Institutional reforms could strengthen investment and output growth prospects, as they have done in the past.
Northern Trust Capital Market Assumptions https://www.capitalmarketassumptions.com/
In a low-interest-rate, low-growth and increased-risk environment, high-yield fixed income looks attractive.
"A mix of elevated valuations, slow global growth, lower profit margins and broader focus on stakeholders versus just shareholders will subdue returns. Emerging markets, carrying attractive valuations but also much uncertainty, will slightly outpace developed markets.
The possible permanent impairment of retail and office properties will hurt global real estate, while natural resources will struggle through subdued global demand. Listed infrastructure will stand out as a higher-yield, lower-risk asset class in a higher risk world."
"Natural resources and global real estate must navigate major headwinds, including supply-demand imbalances and a changing retail environment, respectively."