In the opening months of 2021, the short‑term economic risks from a worsening pandemic could weigh on global equity and credit markets, Giroux says. However, economic and earnings growth could improve dramatically later in the year if the new vaccines can rapidly bring down infection rates.
But a 2021 earnings recovery might not translate into continued strong rallies in global equity prices, Giroux cautions. To a large degree, he says, an economic and earnings recovery already has been priced in by the markets. “Expectations are high, so we could see good earnings results but still see the market trade off a bit.”
Thomson thinks global equities could perform reasonably well in 2021, helped by the same factors that propelled the 2020 rally: supportive fiscal policy and ample monetary liquidity. “It feels to me like there’s still a lot of money on the sidelines that could make its way into risk assets,” he says.
For fixed income investors, 2021 could be challenging, as the falling yields and tightening credit spreads that boosted broad market returns in 2020 aren’t likely to play that role again. Rather, extended durations and the potential for a modest revival in inflation could make managing interest rate risk a portfolio priority, boosting the appeal of floating rate assets.
In both equity and credit markets, T. Rowe Price investment leaders say, the uneven impact of the pandemic and the recovery on countries, industries, and individual companies is likely to make strong fundamental analysis and skilled active security selection a critical component of investment success.