Q1 2021 Global Asset Allocation Views

Jan 13, 2021

Q1 2021 Global Asset Allocation Views

Review

  • The global economy showed resilience throughout the COVID-19 crisis of 2020, supported by a policy fueled recovery
  • The roll-out of effective vaccines provides a light at the end of the tunnel
  • Large household savings provides pent-up demand once all lockdown restrictions have ended

Five phases of 2020

  1. Early Optimism: Jan to Mid Feb – The biggest risk entering 2020 was the continued trade war between the U.S. and China.  A phase one deal was agreed, and markets were poised to repeat a strong 2019.
  2. COVID-19 Sell off: Mid Feb to April – By the end of March, markets were in freefall as a novel coronavirus from China, that appeared to have been contained earlier, turned into a pandemic.  Unemployment skyrocketed and much of the global economy was placed on lockdown.
  3. Policy Fueled Recovery: April to September – Unlike the Great Financial Crisis of 2008, the Fed reacted immediately providing unprecedented liquidity.  Even fiscal policy came fast with the passing of the CARES Act providing loans to businesses, increased unemployment benefits, and one-off relief checks.  By June, the S&P 500 had already recovered from the March recession.  Other areas of the markets (Energy, Financials, Tourism, REITs) have bounced back, but are still off their February levels.
  4. Second Wave/election fears: September to November – Markets sputtered in September/October as a second wave seemed imminent and presidential election uncertainties became front and center.
  5. Vaccines and further policy support: November to year end – November brought the 1-2 punch of a Biden victory with divided government and two promising vaccines going into year-end.  Democrats are on the verge of consolidating a slim Senate majority by winning two run-off elections in Georgia.  Markets have continued higher to start the year based on further fiscal stimulus and growing optimism that vaccines may finally get us over the hump.

2021 Themes

  • U.S. dollar continues lower
  • Stocks over bonds; bonds negative for first time since 2013 on rising interest rates from a lower yield
  • International, Small Cap, Value over Domestic, Large Cap, Growth
  • Continued support from fiscal, monetary, and interest expense stimulus; Interest expense stimulus is the ability of businesses/households to recapitalize their debt at lower interest rates

I see a positive year overall for markets with below average returns from the S&P 500 as large cap growth underperforms.  International and small cap markets will have above average returns as global growth picks up and the dollar weakens.

2021 Risks

  • The economic recovery could take longer than the markets are anticipating
  • Inflation could spike becoming a headwind for equities
  • Excessive optimism in areas of the markets (Bitcoin, Tesla, etc.) coupled with policy mishaps leads to a mid-year correction

Q1 Model Changes:

  • Adding Emerging Market Debt and reducing Core Fixed Income
    • Increase currency and credit risk in search of yield; decrease interest rate risk from rising interest rates
  • Adding Small Cap Value and reducing Big Tech (FAANG)
    • Increase exposure to the worst style/size of the last decade that I see benefiting from a new global growth cycle; decrease Big Tech which has been the best asset class over the past decade and will see continued scrutiny from the Department of Justice

Written by:  Antonio Belmonte, CFA, Chief Investment Officer

These are the opinions of Antonio Belmonte and not necessarily those of Cambridge, are for information purposes only, and should not be construed or acted upon as individualized investment advice.  Investing involves risk.  Depending on the types of investments, there may be varying degrees of risk.  Investors should be prepared to bear loss, including total loss of principal.  The strategies discussed herein are not designed based on the individual needs of any one specific client or investor.  In other words, it is not a customized strategy designed on the specific financial circumstances of the client.  However, prior to opening an account, Cambridge will consult with you to determine if your financial objectives are appropriate for investing in the model.  You are also provided the opportunity to place reasonable restrictions on the securities held in your account.