Our outlook for 2021 is that the delivery of a vaccine in the first half of the year should lead to economic recovery in the second half due to pent-up demand. Similarly, travel and leisure will likely improve in the back half of 2021, with domestic and regional travel improving ahead of international. We believe a post-pandemic recovery will favour a broader rally in stocks and help to rebalance equity markets that have become heavily biased towards large-capitalization growth and momentum stocks.
Regionally, Asia has generally (apart from India) handled the pandemic better than the rest of the world. This has greatly supported its economic recovery, which is already back to pre-pandemic levels. Chinese and U.S. relations could improve under president-elect Joe Biden, but it will not be a reset to the pre-Trump era relations. Overall, Asian economies and markets may lead the post-crisis recovery. Elsewhere, equity valuations favour the U.K., continental Europe and other international developing and developed markets. However, the fallout of a no-deal Brexit is still uncertain.
Looking to equities, we expect small to mid-capitalization stocks to benefit from an economic recovery. A weaker U.S. dollar would likely favour non-North American equities.
Positioning and opportunities
At Black Creek, we do not position our portfolios based on any short-term market view because we believe predictions based on what the market or economy will do in the short-term are inherently unreliable. We are acutely aware of the forces within global markets, as this is the environment in which our portfolio holdings operate, however, we take a bottom-up approach. For us, successful investing requires evaluating companies of interest on a fundamental basis and having the patience to take a long-term strategy.
We build unconstrained, high-conviction and concentrated portfolios that look very different than the market. We believe that having a differentiated view is the only way to produce differentiated results for our clients. As always, we will continue to look past the noise of the markets and use volatility to our advantage as we invest in a portfolio of winning businesses at attractive valuations.
- There are a variety of risks that could raise concerns in the coming year as noted below. But staying true to our investment strategy, we monitor these factors to both mitigate the downside and capitalize on investment opportunities.
- COVID-19 vaccines have been approved in many countries and are beginning to be distributed. However, infections continue to surge across the developed world and restrictions to contain the virus’s spread could mean a long and difficult winter.
- A new mutation of the virus could cause a renewed cycle of lockdowns.
- Equity markets are increasingly beholden to accommodative central bank policies and low interest rates.
- High (and in some cases stratospheric) valuations and unrealistic growth expectations are a concern for certain areas of the market, including large-capitalization technology stocks, electric vehicle manufacturers and new initial public offerings (IPOs).
- Equity valuations do matter, less so in the short run, but certainly in the long run.
- Government stimulus and central bank support for economies through the pandemic has led to an extraordinary debt burden for many governments, individuals and companies.
- If inflation rebounds quicker than expected, it could lead governments to raise rates and reduce stimulus.
- If governments taper support, companies and individuals will have to focus on deleveraging, which will impact spending and investment. We are also wary of commodity price inflation.
- Tax hikes are a possibility to help pay the bill for COVID-19 support.
- We could see a government crackdown on big technologies’ power and monopolistic practices in the U.S., Europe and China.
- A dominant (reserve currency) U.S. dollar is not a given.
- Despite a growing consumer base, Asian economies remain dependent on global manufacturing and trade.
- Geopolitically, we are monitoring the ongoing U.S.-China trade tensions, as well as the upcoming French and German elections.
- A major cyber security/geopolitical event that would test the incoming U.S. administration.
- A positive upside risk could come from pent up demand that is beyond expectations (beginning as soon as March) in economies which open early.
Sources: Black Creek Investment Management as at December 22, 2020.
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© CI Investments Inc. 2020. All rights reserved. Published December 30, 2020