Morgan Stanley
  • Thoughts on the Market
  • Jan 13, 2021

5 Equities Investment Themes for 2021

Adam Virgadamo

Transcript

Welcome to Thoughts on the Market. I'm Adam Virgadamo, U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about key themes for global equities in the year ahead. It's Wednesday, January 13th at noon in New York.

As we enter 2021, vaccines are bringing hope for reopening and a return to normal. But the reality is that markets and the world are constantly evolving. That evolution creates alpha opportunities. So each year, Morgan Stanley Research senior analysts from around the world huddle up to discuss ideas that will shape investment returns in the years ahead.

This year's meeting over video conference felt a little bit different, but the format didn't limit the breadth of discussion. So I thought I'd share some of the high level thoughts on trends that we expect to shape markets in 2021 and beyond.

First, post-pandemic economies will look a bit different. We see a V-shaped recovery, but history tells us that every recession brings some economic scarring. Given the scale of the Great COVID Recession, this time will not be different and how we heal matters. Proactive fiscal policy has been a pillar of the recovery and we expect structurally higher government spending going forward. But it will prompt debate. There's a real possibility that higher spending means higher rates, higher inflation, and sharper and shorter business cycles. All of that means higher volatility and a broader role for active portfolio management.

Second, reopening will likely bring wallet share shifts. The recession accelerated digital adoption trends, propelling tech to new all time highs as a percentage of the market. A reopening will bring some wallet share reversion, but 2020's winners aren't going to sit still and tech's giants are going to push to make this year's share gains permanent. We see opportunities in identifying how much 2021 spending patterns resemble 2020 vs. 2019.

Third, covid-19 actually made us more productive. Even before covid-19, we saw the deployment of technology to disrupt existing business models. 2020 saw this trend continue with robust demand for investment in artificial intelligence, automation, and industrial software. The application of technology in response to the pandemic led to new ways of operating that made companies more efficient and helped protect their margins through the recession. We suspect that these efficiency gains are really just the beginning, as continued diffusion of technology across industries can boost productivity for years to come.

Fourth, 2021 may be the year that ESG investing goes mainstream. With more money moving into ESG, pure play green investments have seen valuations skyrocket. Across our U.S. clean energy coverage, average enterprise multiples were up roughly 440% in 2020. Which begs the question, is a fundamental shift in the valuation of green assets underway? And will premium 'green' valuations create a halo effect for companies trying to become 'greener?'

We think that the power behind green investing and the common sense investment approach of buying at lower prices mean that the market may embrace rate of change ESG investing and reward companies improving their ESG characteristics.

Finally, we hope that 2021 brings some return to normal for all our listeners. That said, remember that when it comes to investing, change will always be part of the equation. In other words, a return to normal in 2021 still means things could be a bit different.

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As vaccines continue to roll out and the world eyes a return to normal, several key themes are emerging that could shape investment returns.

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