2020 has seen defensive assets outperform cyclicals. We expect the opposite in 2021. Despite short term Covid-related risks, recent vaccine news provides valuable light at the end of the tunnel. Unfortunately, some cyclical assets have already priced-in a lot of economic recovery. So, should we focus on economic momentum or on valuations? We do a bit of both within our Model Asset Allocation and reduce credit exposures in favour more cyclical assets, especially real estate, equities and industrial commodities. Cash remains our diversifier of choice. On a regional basis we favour emerging markets (EM) and Europe (including the UK).
Model asset allocation
In our view:
- Equities offer good returns, especially with an early vaccine. We increase to slightly Overweight.
- Real estate has the potential to produce the best returns. We increase to Maximum.
- Corporate high-yield (HY) now looks less interesting. We reduce to Neutral.
- Corporate investment-grade (IG) now holds no advantage over cash. We reduce to zero.
- Government debt is unattractive. We remain Underweight.
- Emerging markets (EM) is still the sovereign space with the best potential. We stay at Maximum.
- Cash returns are low but stable and de-correlated. We stay at Maximum.
- Commodities are supported by the cycle. We increase to Maximum.
- Gold is expensive and threatened by rising yields. We remain at zero.
Our best-in-class assets (based on 2021 projected returns)
- UK equities
- EM real estate
- EM government bonds
- Energy
Read our full 2021 assessment here