Insight Article Desktop Banner
 
 
2021 Outlooks
  •  
janvier 11, 2021

Now It Gets Tougher

Insight Video Mobile Banner
 
janvier 11, 2021

Now It Gets Tougher


2021 Outlooks

Now It Gets Tougher

Share Icon

janvier 11, 2021

 
 

In my opinion, equity returns post-covid are going to be tougher to generate than while we remain in the midst of this horrible pandemic. Strange I know, but equity returns do not necessarily line up with the current state of the economy.

 
 

However, before we go into detail about why 2021 will be a more challenging year, let’s quickly review the past year. In my opinion, there were three very powerful investment lessons from 2020:

  1. History does tend to repeat itself in the stock market. The path the market has followed during the pandemic has not been very different than in other pandemics.
  2. The ‘disconnect’ between the stock market and the economy did not exist in the past either. The stock market is a forward indicator. The economy and investor emotions are coincidental/lagging.
  3. Don’t fight the Fed. Liquidity injections drive asset prices.
     

As I am fond of saying, I firmly believe complexity creates readership and viewership, but more often than not, investing is more straightforward. “Simplicity, while rarely intellectually satisfying, is hard to beat in this business.”1

Keeping these important lessons in mind, let’s now turn to what we see as we begin our much-anticipated new year.

1. AS A BACKDROP, 2020 WAS A CLASSIC FIRST YEAR COMING OUT OF A RECESSION. EERILY SIMILAR TO 2009.

  • There was way too much bearishness on the part of investors.
  • Too much cash sat on the sidelines as the market recovered and moved upward following the drop in March.
  • There was a lack of volatility once the market began to rally.
  • Bears capitulated as the market ascended.
     

2. WE EXPECT 2021 TO BE SIMILAR TO 2010 FOR THE MARKET: THE SECOND YEAR OF A NEW BULL MARKET.

  • Following the historically strong year in 2009, the market2 returned a good year overall in 2010.
  • But perhaps the market first needs to take a breather after the 65% return from the March low. As it did in 2010.
  • Unfortunately, the market rarely, if ever, simply pauses. I think we should brace ourselves for a lot more volatility in 2021, just as happened in 2010.
  • Increased volatility will shake out the reluctant bulls at the exact wrong time! We have seen this movie before — hold tight! As I said, the second year of a new bull market tends to be quite good overall … just more gut wrenching.
     

3.  2010’S VOLATILITY WAS CAUSED BY A GROWTH SCARE. IN CONTRAST, 2021 COULD BE CAUSED BY A GROWTH BOOM:

  • Overwhelmingly, sell side forecasts believe that US 10-year Treasury yields will finish the year at less than 1.5%. Perhaps we should expect a bigger than expected move higher in bond yields if we get a post-pandemic spending surge.
  • The result could force the Fed to be less dovish.
  • As rates move up, high equity valuations become harder to justify.
  • Consider:
    • Since 1976, the average forward P/E ratio for the S&P 500 has been 14x … putting the current multiple of 23x in the 98th percentile vs. history. Over those 44 years, US equities have never sustained a multiple this high outside of the tech bubble.3
    • Since 1976, the gap between the S&P earnings yield and the yield on US 10-year notes has averaged 240 bps … as compared to 340 bps currently … putting today’s earnings yield spread in just the 30th percentile vs. history. Said another way, stocks relative to Treasuries are still on the cheaper end of history.3
    • Hence, if current valuations are predicated on low rates, returns become more challenging if rates begin to surprise on the upside.

­   

4. THERE IS A SUBSET OF GROWTH STOCKS THAT ARE AS HIGHLY PRICED AS AT THE TOP OF THE TECH BUBBLE IN 2000.

  • When looking at the 100 fastest growing companies in the US, valuation levels are not at their most extreme, and in fact came down as a group late in 2020. However, when looking at the 50 fastest growers, valuation levels are as stretched as they were in 2000.4
  • As they did in 2000, could higher rates and/or a less dovish Fed cause the tech bubble to deflate? Is it time to back away from these fastest growers that have experienced a frenzy of buying of late?

 

5.  VALUE STOCKS, HOWEVER, REPRESENT A COMPELLING OPPORTUNITY.

  • Historically, the best time to own value stocks has been when the economy is exiting a recession.
  • As a group, value stocks began their recovery in 2020, yet they are still over 2.5 standard deviations cheap relative to their history.5 We believe there is still plenty of money to be made!
  • For us, the best opportunity to capture the recovery is in financials and consumer discretionary stocks.
     
 
 
 
Display 1: Focus more on the direction of currencies / less on politics
 

Past performance is no guarantee of future results. The index performance is provided for illustrative purposes only and is not meant to depict the performance of a specific investment.

 
 

6. US DOLLAR DEPRECIATION IS A POSITIVE FOR EMERGING MARKETS AND ESPECIALLY ASIA.

  • In our opinion, we should focus more on the direction of currencies and less on politics. As shown in Display 1, when the US Dollar appreciates, Asia ex-Japan equity markets have tended to move down, but with US Dollar depreciation, Asia ex-Japan equities have tended to move up, as has been the case recently.6
  • Currently, we prefer Asia ex-Japan markets more than Europe or Japan.
  • But they won’t be immune to volatility.
     

My conclusion for 2021? We believe it will be an overall good year for equities, but BUCKLE UP!!! That would be consistent with the second year of a bull market.

Call it simplistic, but you know what I think about simplicity.

 
 

1 Strategas. December 2020.

2 The S&P 500 Index represents the “market”.

3 Goldman Sachs, December 3, 2020. The index performance is provided for illustrative  purposes only and is not meant to depict the performance of a specific investment. Past performance is no guarantee of future results. See Disclosure section for index definitions.

4 Factset. High growth as defined by the valuation differential in terms of standard deviation between the highest growth decile of the Russell 1000 based on low beta, high growth, high volatility, and high momentum versus that of the market median.

5 Source: Bloomberg, Factset. 1990 through 2020. Value spread as defined by the valuation differential between the cheapest decile of the Russell 1000 versus that of the market average. Valuation is based upon price-to-book, price-to-earnings, and price-to-free cash in terms of standard deviation.

6 Bloomberg. Asia ex-Japan Currencies as defined by MSASJCXO - MSCI AC Asia ex Japan Currency USD Index. Asia ex-Japan Equities as defined by MXASJ - MSCI AC Asia ex Japan Index.

 
 

Risk Considerations

There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline and may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this portfolio. Please be aware that this portfolio may be subject to certain additional risks. In general, equities securities’ values also fluctuate in response to activities specific to a company. Stocks of small-and medium-capitalization companies entail special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. Investments in foreign markets entail special risks such as currency, political, economic, market and liquidity risks. Illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk). Non-diversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility.

 
andrew.slimmon
Head of Applied Equity Advisors Team
Applied Equity Advisors Team
 

Select Product(s)

Right Click Edit

 
 
2021 60 Second Market Outlook: Andrew Slimmon - Applied Equity Advisors Team
Insight thumbnail video icon
 
Andrew Slimmon, Head of the Applied Equity Advisors Team, provides a 60 second overview of why he believes that 2021 will be an overall good year for equities, but we should anticipate a tougher road ahead, with a lot more volatility.
 
 
 
 

INDEX DEFINITIONS
The indexes are unmanaged and do not include any expenses, fees or sales charges. It is not possible to invest directly in an index. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto. The MSCI AC (All Country) Asia ex Japan Index is a free float‐adjusted market capitalization weighted index that is designed to measure the equity market performance of Asia, excluding Japan. The S&P 500® Index measures the performance of the large cap segment of the U.S. equities market, covering approximately 75% of the U.S. equities market. The Index includes 500 leading companies in leading industries of the U.S. economy.

DISTRIBUTION
This communication is only intended for and will only be distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations.

Ireland: MSIM Fund Management (Ireland) Limited. Registered Office: The Observatory, 7-11 Sir John Rogerson's Quay, Dublin 2, D02 VC42, Ireland. Registered in Ireland as a private company limited by shares under company number 616661. MSIM Fund Management (Ireland) Limited is regulated by the Central Bank of Ireland. United Kingdom: Morgan Stanley Investment Management Limited is authorised and regulated by the Financial Conduct Authority. Registered in England. Registered No. 1981121. Registered Office: 25 Cabot Square, Canary Wharf, London E14 4QA, authorised and regulated by the Financial Conduct Authority. Dubai: Morgan Stanley Investment Management Limited (Representative Office, Unit Precinct 3-7th Floor-Unit 701 and 702, Level 7, Gate Precinct Building 3, Dubai  International Financial Centre, Dubai, 506501, United Arab Emirates. Telephone: +97 (0)14 709 7158). Germany: MSIM Fund Management (Ireland) Limited Niederlassung Deutschland, Grosse Gallusstrasse 18, 60312 Frankfurt am Main, Germany (Gattung: Zweigniederlassung (FDI) gem. § 53b KWG). Italy: MSIM Fund Management (Ireland)Limited, Milan Branch (Sede Secondaria di Milano) is a branch of MSIM Fund Management (Ireland) Limited, a company registered in Ireland, regulated by the Central Bank of Ireland and whose registered office is at The Observatory, 7-11 Sir John Rogerson's Quay, Dublin 2, D02 VC42, Ireland. MSIM Fund Management (Ireland) Limited Milan Branch (Sede Secondaria di Milano) with seat in Palazzo Serbelloni Corso Venezia, 16 20121 Milano, Italy, is registered in Italy with company number and VAT number 11488280964. The Netherlands: MSIM Fund Management (Ireland) Limited, Rembrandt Tower, 11th Floor Amstelplein 1 1096HA, Netherlands. Telephone: 31 2-0462-1300. Morgan Stanley Investment Management is a branch office of MSIM Fund Management (Ireland) Limited. MSIM Fund Management (Ireland) Limited is regulated by the Central Bank of Ireland. France: MSIM Fund Management (Ireland) Limited, Paris Branch is a branch of MSIM Fund Management (Ireland) Limited, a company registered in Ireland, regulated by the Central Bank of Ireland and whose registered office is at The Observatory, 7-11 Sir John Rogerson's Quay, Dublin 2, D02 VC42, Ireland. MSIM Fund Management (Ireland) Limited Paris Branch with seat at 61 rue de Monceau 75008 Paris, France, is registered in France with company number 890 071 863 RCS. Switzerland: Morgan Stanley & Co. International plc, London, Zurich Branch Authorised and regulated by the Eidgenössische  Finanzmarktaufsicht (“FINMA”). Registered with the Register of Commerce Zurich CHE-115.415.770. Registered Office: Beethovenstrasse 33, 8002 Zurich, Switzerland, Telephone +41 (0) 44 588 1000. Facsimile Fax: +41(0) 44 588 1074.

Japan: For professional investors, this document is circulated or distributed for informational purposes only. For those who are not professional investors, this document is provided in relation to Morgan Stanley Investment Management (Japan) Co., Ltd. (“MSIMJ”)’s business with respect to discretionary investment management agreements (“IMA”) and investment advisory agreements (“IAA”). This is not for the purpose of a recommendation or solicitation of transactions or offers any particular financial instruments. Under an IMA, with respect to management of assets of a client, the client prescribes basic management policies in advance and commissions MSIMJ to make all investment decisions based on an analysis of the value, etc. of the securities, and MSIMJ accepts such commission. The client shall delegate to MSIMJ the authorities necessary for making investment. MSIMJ exercises the delegated authorities based on investment decisions of MSIMJ, and the client shall not make individual instructions. All investment profits and losses belong to the clients; principal is not guaranteed. Please consider the investment objectives and nature of risks before investing. As an investment advisory fee for an IAA or an IMA, the amount of assets subject to the contract multiplied by a certain rate (the upper limit is 2.20% per annum (including tax)) shall be incurred in proportion to the contract period. For some strategies, a contingency fee may be incurred in addition to the fee mentioned above. Indirect charges also may be incurred, such as brokerage commissions for incorporated securities. Since these charges and expenses are different depending on a contract and other factors, MSIMJ cannot present the rates, upper limits, etc. in advance. All clients should read the Documents Provided Prior to the Conclusion of a Contract carefully before executing an agreement. This document is disseminated in Japan by MSIMJ, Registered No. 410 (Director of Kanto Local Finance Bureau (Financial Instruments Firms)), Membership: the Japan Securities Dealers Association, The Investment Trusts Association, Japan, the Japan Investment Advisers Association and the Type II Financial Instruments Firms Association.

U.S.
A separately managed account may not be appropriate for all investors. Separate accounts managed according to the Strategy include a number of securities and will not necessarily track the performance of any index. Please consider the investment objectives, risks and fees of the Strategy carefully before investing. A minimum asset level is required. For important information about the investment manager, please refer to Form ADV Part 2.

Please consider the investment objectives, risks, charges and expenses of the funds carefully before investing. The prospectuses contain this and other information about the funds. To obtain a prospectus please download one at morganstanley.com/im or call 1-800-548-7786. Please read the prospectus carefully before investing.

Morgan Stanley Distribution, Inc. serves as the distributor for Morgan Stanley Funds.

NOT FDIC INSURED | OFFER NO BANK GUARANTEE | MAY LOSE VALUE | NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY | NOT A BANK DEPOSIT

Hong Kong: This document has been issued by Morgan Stanley Asia Limited for use in Hong Kong and shall only be made available to “professional investors” as defined under the Securities and Futures Ordinance of Hong Kong (Cap 571). The contents of this document have not been reviewed or approved by any regulatory authority including the Securities and Futures Commission in Hong Kong. Accordingly, save where an exemption is available under the relevant law, this document shall not be issued, circulated, distributed, directed at, or made available to, the public in Hong Kong. Singapore: This document should not be considered to be the subject of an invitation for subscription or purchase, whether directly or indirectly, to the public or any member of the public in Singapore other than (i) to an institutional investor under section 304 of the Securities and Futures Act, Chapter 289 of Singapore (“SFA”); (ii) to a “relevant person” (which includes an accredited investor) pursuant to section 305 of the SFA, and such distribution is in accordance with the conditions specified in section 305 of the SFA; or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA. This material has not been reviewed by the Monetary Authority of Singapore. Australia: This publication is disseminated in Australia by Morgan Stanley Investment Management (Australia) Pty Limited ACN: 122040037, AFSL No. 314182, which accept responsibility for its contents. This publication, and any access to it, is intended only for “wholesale clients” within the meaning of the Australian Corporations Act.

BRAZIL. This document does not constitute a public offering of securities for the purposes of the applicable Brazilian regulations and has therefore not been and will not be registered with the Brazilian Securities Commission (Comissão de Valores Mobiliários) or any other government authority in Brazil. All information contained herein is confidential and is for the exclusive use and review of the intended addressee of this document, and may not be passed on to any third party.

CHILE. Neither the Fund nor the interests in the Fund are registered in the Registry of Offshore Securities (el Registro de Valores Extranjeros) or subject to the supervision of the Commission for the Financial Market (la Comisión para el Mercado Financiero). This document and other offering materials relating to the offer of the interests in the Fund do not  constitute a public offer of, or an invitation to subscribe for or purchase, the Fund interests in the Republic of Chile, other than to individually identified purchasers pursuant to a private  offering within the meaning of Article 4 of the Chilean Securities Act (la Ley del Mercado de Valores) (an offer that is not “addressed to the public at large or to a certain sector or  specific group of the public”).

COLOMBIA. This document does not constitute an invitation to invest or a public offer in the Republic of Colombia and is not governed by Colombian law. The interests in the Fund have not been and will not be registered with the National Register of Securities and Issuers (el Registro Nacional de Valores y Emisores) maintained by the Financial Supervisory Authority of Colombia (la Superintendencia Financiera de Colombia) and will not be listed on the Colombian Stock Exchange (la Bolsa de Valores de Colombia). The interests in the Fund are being offered under circumstances which do not constitute a public offering of securities under applicable Colombian securities laws and regulations. The offer of the interests in the Fund is addressed to fewer than one hundred specifically identified investors. Accordingly, the interests in the Fund may not be marketed, offered, sold or negotiated in Colombia, except under circumstances which do not constitute a public offering of securities under applicable Colombian securities laws and regulations. This document is provided at the request of the addressee for information purposes only and does not constitute a solicitation. The interests in the Fund may not be promoted or marketed in Colombia or to Colombian residents unless such promotion and marketing is carried out in compliance with Decree 2555 of 2010 and other applicable rules and regulations related to the promotion of foreign financial and securities related products or services in Colombia.

Colombian eligible investors acknowledge that the interests in the Fund (i) are not financial products, (ii) are transferable only in accordance with the terms of the Fund's constitutional  documents and (iii) do not offer any principal protection.

Colombian eligible investors acknowledge Colombian laws and regulations (in particular, foreign exchange, securities and tax regulations) applicable to any transaction or investment  consummated in connection with an investment in the Fund, and represent that they are the sole liable party for full compliance with any such laws and regulations. In addition,  Colombian investors acknowledge and agree that the Fund will not have any responsibility, liability or obligation in connection with any consent, approval, filing, proceeding,  authorization or permission required by the investor or any actions taken or to be taken by the investor in connection with the offer, sale or delivery of the interests in the Fund under  Colombian law.

MEXICO. Any prospective purchaser of the interests in the Fund must be either an institutional investor (inversionista institucional) or a qualified investor (inversionista calificado) within the meaning of the Mexican Securities Market Law (Ley del Mercado de Valores) (the “Securities Market Law”) and other applicable Mexican laws in effect.

The interests in the Fund have not and will not be registered in the National Registry of Securities (Registro Nacional de Valores) maintained by the Mexican Banking and Securities Commission (Comisión Nacional Bancaria y de Valores). The interests in the Fund may not be offered or sold in the United Mexican States by any means except in circumstances which constitute a private offering pursuant to Article 8 of the Securities Market Law and its regulations. No Mexican regulatory authority has approved or disapproved the interests in the Fund or passed on the solvency of the Fund. All applicable provisions of the Securities Market Law must be complied with in respect of any sale, offer or distribution of, or intermediation in respect of, the Fund interests in, from or otherwise involving Mexico, and any resale of the interests in the Fund within Mexican territory must be made in a manner that will constitute a private offering pursuant to Article 8 of the Securities Market Law and its regulations.

PERU. The interests in the Fund have not been and will not be registered in Peru under Decreto Legislativo 862: Ley de Fondos de Inversión y sus Sociedades Administradoras or under Decreto Legislativo 861: Ley del Mercado de Valores (the “Securities Market Law”), and are being offered to institutional investors only (as defined in article 8 of the Securities Market Law) pursuant to a private placement, according to article 5 of the Securities Market Law. The interests in the Fund have not been registered in the securities market public registry  (Registro Público del Mercado de Valores) maintained by, and the offering of the Fund interests in Peru is not subject to the supervision of, the Superintendencia del Mercado de  Valores. Any transfers of the Fund interests shall be subject to the limitations contained in the Securities Market Law and the regulations issued thereunder.

URUGUAY. The offering of the Interests qualifies as a private placement pursuant to section 2 of Uruguayan law 18,627. The Interests will not be offered or sold to the public (Individuals or Companies) in Uruguay, except in circumstances which do not constitute a public offering or distribution through a recognized Exchange under Uruguayan laws and regulations. Neither the Fund nor the Interests are or will be registered with la Superintendencia de Servicios Financieros del Banco Central del Uruguay. The Fund corresponds to an investment fund that is not an investment fund regulated by Uruguayan law 16,774 dated September 27, 1996, as amended.

IMPORTANT INFORMATION

EMEA: This marketing communication has been issued by MSIM Fund Management (Ireland) Limited. MSIM Fund Management (Ireland) Limited is regulated by the Central Bank of Ireland. MSIM Fund Management (Ireland) Limited is incorporated in Ireland as a private company limited by shares with company registration number 616661 and has its registered address at The Observatory, 7-11 Sir John Rogerson's Quay, Dublin 2, D02 VC42,  Ireland.  

There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Prior to investing, investors should carefully review the strategy’s / product’s relevant offering document. There are important differences in how the strategy is carried out in each of the investment vehicles.

This material is a general communication, which is not impartial and has been prepared solely for informational and educational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. All investments involve risks, including the possible loss of principal. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

Except as otherwise indicated, the views and opinions expressed herein are those of the portfolio management team, are based on matters as they exist as of the date of preparation and not as of any future date, and will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date hereof.

Forecasts and/or estimates provided herein are subject to change and may not actually come to pass. Information regarding expected market returns and market outlooks is based on the research, analysis and opinions of the authors. These conclusions are speculative in nature, may not come to pass and are not intended to predict the future performance of any specific Morgan Stanley Investment Management product.

This communication is not a product of Morgan Stanley’s Research Department and should not be regarded as a research recommendation. The information contained herein has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

Certain information herein is based on data obtained from third party sources believed to be reliable. However, we have not verified this information, and we make no representations whatsoever as to its accuracy or completeness.

MSIM has not authorised financial intermediaries to use and to distribute this document, unless such use and distribution is made in accordance with applicable law and regulation.

Additionally, financial intermediaries are required to satisfy themselves that the information in this document is appropriate for any person to whom they provide this document in view of that person’s circumstances and purpose. MSIM shall not be liable for, and accepts no liability for, the use or misuse of this document by any such financial intermediary.

This document may be translated into other languages. Where such a translation is made this English version remains definitive. If there are any discrepancies between the English version and any version of this document in another language, the English version shall prevail. Morgan Stanley Investment Management is the asset management division of Morgan Stanley.

The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without MSIM’s express written consent.

All information contained herein is proprietary and is protected under copyright law.

© 2021 Morgan Stanley. All rights reserved.

 

Les utilisateurs sont invités à prendre connaissance des Conditions d’utilisation avant d’engager toute procédure, car celles-ci mentionnent des restrictions légales et réglementaires applicables à la diffusion des informations relatives aux produits d’investissement de Morgan Stanley Investment Management.

Les services décrits sur ce site Web peuvent ne pas être disponibles dans certaines juridictions ou pour certaines personnes. Merci de consulter nos Conditions d’utilisation pour de plus amples informations.


Confidentialité    •    Conditions d'utilisation

©  Morgan Stanley. Tous droits réservés.