Americas CIO View

2021 outlook: no easy choices, diversify

Beware false confidence, many uncertainties remain, boost diversification

U.S. and European economies should improve as the pandemic fades and services recover. But the now rampant contagion requires extensive vaccination for a full recovery. This winter will weigh on the recovery, but it is within reach for late 2021. Recovery suggests that long-term interest rates climb, at least modestly, and S&P 500 earnings per share (EPS) should return to its prior peak probably in the second quarter of 2021. A reasonable and constructive outlook, but it provides little help in forecasting equity returns for 2021. Fair or sustainable price-to-earnings ratios (P/Es) on mid-cycle earnings remains uncertain. This is the key uncertainty we cited last year and it persists.

Let the new cycle reveal itself, new policies and macro trends still unknown …

The inflation debate rages and normalized real interest rates remain a mystery. How long this new cycle lasts and what real growth and holistic prosperity it delivers is just a guess at this early point. Radical policy changes are unlikely with a split Senate, but clarity has not emerged yet on new domestic or foreign policies from a Biden administration. Regulatory changes will come. U.S. fiscal (spend) and monetary policy remains uncertain. Thus, it is an unsure outlook for basic macroeconomic variables, such as trend inflation, real gross-domestic-product (GDP) growth, interest rates, foreign-exchange (FX) rates, and commodity prices. All key variables for value stocks.

…yet many powerful secular trends have legs: digitalization, aging, conservation

Many important super-cycle or secular trends maintain strong momentum that can guide long-term investors. Such trends include more digitalization of the economy, including shifts from physical business locations and in person connectivity to virtual, automation and machine performed services. Aging and science will push economies further toward healthcare. Clean energy and conservation is the will of prosperous people. These trends support growth stocks. Most key trends supporting growth converge in Asia with greater speed and ultimate size. We think Americans should consider investing more in Asia.

Investment themes and actions for 2021: more Asia, small caps, active management

  1. Recovery in 2021, then what? Recovery in services; most upside at travel, goods near plateau
  2. Low interest rates still likely: But if stimulus is excessive or wasteful, high inflation might follow
  3. President Biden with a split Senate: Watch appointments and Jan 5, Georgia Senate races
  4. Post crisis fiscal-monetary policy separation or fusion? Watch deficits and U.S. Federal Reserve (Fed) liabilities – Power of the purse is in the hands of three key women: Madames Pelosi, Harris and Yellen
  5. Treasury yield curve: Steepness will depend on inflation uncertainty vs. risk hedge value If overweight credit, inflation protection with TIPS and gold; if overweight equities, hedge risk with long-term Treasury bonds and seek greater diversification within equities
  6. Credit pickers: We favor high yield over investment grade now, given selection opportunities
  7. New economy infrastructure: 5G, semi fabs, bio labs, green energy, agile/cyber defense
  8. Car wars: The ‘20s will be the decade of electric cars; will it be a boom or bust for investors?
  9. Energy delivered as a current: From pipelines to wires, electric utilities positioned to deliver
  10. What of cities? Still crucial hubs, but must compete harder to attract … on taxes, quality of life Muni bonds & REITs good return to city plays, sensitive to local policy focus and tax discipline
  11. Who leads Asia? Dominant China or regional equals; examples from the West, but not orders
  12. S&P 500 is a growth index now: About 45% of S&P 500 is tech / digital and 2/3rd growth sectors
  13. S&P 500 Titans: Top 5, 10, and 50 stocks by market-cap size are now 23%, 31%, and 56% of index
  14. Russell 2000: Shifted from value tilted (from Banks) to a more style balanced index (to biotech)
  15. Asia equities: Asia is now 15% of MSCI AC World Index, we favor Asia equities for 2021 and beyond
  16. S&P 500 EPS outlook: 2021E (estimate) $170 and 2022E $185, assuming no corporate-tax rate hikes
  17. S&P 500 targets: 3,800 for 2021 end and 4,000 for 2022 end, based on trailing S&P 500 P/E of 21.5x
  18. Danger P/Es?: 20+ supported by low real yields, S&P 500 composition, low investor taxes and fees
  19. Sector tilts: more neutral on style for 2021, still prefer growth for the long-term
  20. Preferred value play: banks should benefit from the service jobs recovery and steeper curve
  21. Reach for 5%+: alpha strategies that work in the big asset classes, be tactical with ETFs



Constructive equity outlook for 2021; Asia preferred region

As we shape our equity market expectations for 2021 we assume continued economic recovery supported by fiscal and monetary policy. More critical, we base our forecasts on the arrival of an efficient Covid vaccination that allows "normal life" by the end of 2021. We forecast 25% to 30% EPS recovery for most markets and "lower for longer" interest rates (U.S. 10-year 1.0% by 2021 yearend). As such, the constellation of TINA (There Is No Alternative), FOMO (Fear Of Missing Out) and rebounding economic activity should support further market upside for equities. Our December 2021 targets are 3.800 for the S&P 500 and 14.000 for the Dax. To get there, investors will have to accept even lower equity risk premiums and higher P/Es than previously assumed.

The likely gridlock in the newly-elected U.S. Congress could become a "goldilocks" environment for U.S. equities. Reflationary pressure should remain limited as the likely Republican Senate majority will only accept a downsized fiscal stimulus and will prevent a reversal of tax reforms. Global trade prospects, too, should benefit from the new political set-up in Washington. However, we expect ex-U.S. markets to continue trading at elevated valuation discounts to the United States, mainly due to the lower relative weight of high-growth stocks. Nevertheless, we have mid-single digit total return expectations for European and Japanese equities for 2021.

We predict double-digit returns for Emerging-Market (EM) equities and upgrade both Asia ex Japan and EM to overweight. Asia is our preferred region for 2021. China has successfully handled the Covid challenges without amassing significant fiscal debt which bodes well for long-term growth prospects. It is now the second time (first time was Global Financial Crisis) that China leads the world economy out of the slump, evidenced by rebounding European and Japanese exports to China. As such, the geopolitical rise of China should become even more visible during the coming years. China remains on track to add technological leadership to its military and economic superpower position. We expect EPS levels for the MSCI AC Asia ex Japan to surpass pre-Covid levels already in 2021, clearly ahead of the United States and Europe.

We believe making money by switching investment styles will be difficult in 2021. We expect several short-lived "cyclical" and "value" rallies as some allocators exit the herd of "growth" investors and will try out something "new." However, interest rates and economic growth prospects are likely to stay too low to make these rallies sustainable and we keep a modest preference for the growth camp for the time being. Most value stocks are biased toward physical and financial assets on their balance sheet. Growth stocks, on the other hand, remain beneficiaries of the global spreading of digital technologies that are based on intangible assets. These offer strong network effects as well as superior and growing free-cash-flow streams to shareholders. Therefore, we are sticking to our information-technology overweight. Work from home and the rising share of e-commerce in retail spending make us stay on the sidelines in the real-estate sector which we recommend to underweight.

It appears that 2021 will see several New "Green Deal" initiatives across the globe that should create thematic investment opportunities in climate technology across many sectors. We have therefore decided to upgrade utilities from underweight to neutral and would focus on renewable energy exposure within the sector. Our ESG-team feels it may be important to keep avoiding sectors with high environmental externalities, like oil, materials and airlines.

A review of recent changes, since the U.S. elections:

  • We adopted a more equity tilted asset allocation: equities 60.5%, fixed income 30.5%, alternatives 9%.
  • We raised our tactical signal or "Next 5%+ move" call for the S&P 500 from "Down" to "Balanced Risk."
  • We raised S&P 500 price target at 2020 yearend from 3.300 to 3.600. Our target for 2021 and 2022 yearend is 3.800 and 4.000.
  • We raised 2020E S&P 500 EPS from $130 to $138, and 2021E EPS from $165 to $170. Our 2022E EPS is $185.
  • With a Republican Senate, we expect better targeted and right-sized stimulus, which reduces risk of interest rate dislocations. Very low nominal and real interest rates persisting helps support an S&P 500 P/E on normalized or recovery earnings that exceeds 20. There is better visibility on normalized or recovery S&P EPS post 3Q20 results, the elections and encouraging vaccine progress. The shift in S&P 500 EPS composition from cyclical-value to secular-growth sectors also helps to support higher fair P/E targets than past years owing to their lower cyclical risk and long-term economic profit growth potential. We think the biggest risk to equities would be a sizable jump in long-term interest rates on inflation fears.
  • We raised communications from equal weight (EW) to overweight (OW) and financials from underweight (UW) to EW. We lowered consumer staples from OW to EW and materials from EW to UW. We stay over-weight healthcare, tech and utilities. We stay underweight energy, industrials and real estate.

Appendix: Performance over the past 5 years (12-month periods)


11/15 - 11/16

11/16 - 11/17

11/17 - 11/18

11/18 - 11/19

11/19 - 11/20







S&P 500






U.S. Treasuries (2-year)






U.S. Treasuries (10-year)






U.S. Treasuries (30-year)






Past performance is not indicative of future returns.
Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 12/14/20


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