A summary of our equity outlook
- Despite the many challenges stemming from the pandemic, equity markets have had a remarkable year. After plunging ~30% in the beginning of the year, U.S. equities recovered at record speeds and traded at or near all-time highs throughout the second half of 2020. Unparalleled government intervention, both on the monetary and fiscal sides, combined with investors willingness to look through the pandemic to a future recovery and pull forward cash flows, has supported equity markets to date.
- We believe that continued government intervention and a gradual reopening will further support U.S. equity markets in 2021. With the backdrop of fiscal stimulus, we believe corporate earnings will be stronger across the board. We have a preference for value and small and mid-cap equities given the significant runup in growth and large-cap.
- Shifting to valuations, we believe U.S. markets are still cheap relative to 2000’s highs, signally valuations may have some runway left as earnings growth catches up to prices. However, we need to monitor for inflection points.
- Looking outside the U.S., international equities, particularly Asian emerging markets, should benefit from a weakening dollar and lower valuations relative to the U.S. We believe emerging markets that stand to benefit from China-related tailwinds look attractive as potential areas of opportunities in the year ahead.
- Over the next decade, we estimate a modest growth rate of ~4-6% globally for equities, but along with that growth may come spikes in volatility due to asset bubbles or reversals in over-concentration. The gap between developed and emerging markets is expected to shrink, as growth in international, in particular emerging, markets growth picks up.
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Tags: Growth, Volatility