2021 Outlook: Vulnerability and resiliency through upheaval - DECEMBER 2020 - GLOBAL INVESTMENT OUTLOOK - Franklin Templeton
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DECEMBER 2020
2021 Outlook:
Vulnerability and
resiliency through
upheaval
FRANKLIN TEMPLETON THINKSTM GLOBAL INVESTMENT OUTLOOK
Not FDIC Insured | May Lose Value | No Bank GuaranteeIntroduction The COVID-19 pandemic instigated extraordinary
challenges, uncertainties and upheavals in 2020.
Businesses and individuals learned how to cope,
while financial markets generally remained resilient.
Looking ahead to 2021, our investment professionals
remain cautious in the near term, but find reasons
to be optimistic. They anticipate the COVID-19 global
economic recovery will accelerate as a vaccine
becomes available and central bank support continues,
and that new investment opportunities will result.
You will notice that our family expanded this year to
include contributions from Brandywine Global, Clarion
Partners, ClearBridge Investments, Martin Currie,
Royce Investment Partners, and Western Asset.
In the following pages, we’re pleased to share this
expanded range of investment experts across
multi-asset investing, equities, fixed income, emerging
markets and real estate.Table of contents
4 Preparing the post-pandemic playbook 16 The year of less uncertainty, more certainty
Franklin Templeton Investment Solutions Brandywine Global
Edward D. Perks, CFA Francis A. Scotland
Chief Investment Officer Director of Global Macro Research
Jack P. McIntyre, CFA
6 ESG will define the post-COVID era Portfolio Manager
Templeton Global Macro
Michael Hasenstab, Ph.D. 18 Income with growth in 2021: Got real estate?
Chief Investment Officer Clarion Partners
Tim Wang, Ph.D.
8 From crisis to recovery—the road ahead Head of Investment Research
Franklin Templeton Fixed Income
Sonal Desai, Ph.D. 20 Conditions supportive of more balanced
Chief Investment Officer equity performance
ClearBridge Investments
10 A year of lingering uncertainty, but ample Scott Glasser
equity opportunities Co-Chief Investment Officer
Franklin Templeton’s Head of Equities
Stephen H. Dover, CFA 22 2021 and beyond: Technology remains a
Head of Equities key geopoliticial battleground
Martin Currie
12 Emerging markets: A strong year, a stronger outlook Kim Catechis
Franklin Templeton Emerging Markets Equity Head of Investment Strategy
Manraj Sekhon, CFA
Chief Investment Officer 24 Factors favoring small-cap stocks in 2021
Royce Investment Partners
26 The gamechanger has arrived
Western Asset
Ken Leech
Chief Investment Officer
2021 Outlook: Vulnerability and resiliency through upheaval 3Preparing the post-pandemic playbook
Ed Perks, CFA
Chief Investment Officer, Franklin Templeton Investment Solutions
Governments and central banks remain measure taken to prevent the disloca- post-pandemic environment, has the
in unprecedented territory as part of the tion of the global economy and cannot potential to raise inflation and would
effort to control COVID-19, while be guaranteed to remain in place. prove a challenge for investors with a
ongoing political uncertainty in the Insufficient stimulus could potentially longer-term perspective predicated on a
United States offers up opportunities increase volatility within markets steady recovery.
and challenges for investors. Risks to as corporate defaults multiply and
recovery are still tilted to the downside, asset prices begin to lose value on The good news amid this uncertainty is
but we look toward 2021 with cautious falling demand and deteriorating that our ability to invest across
optimism, following an extraordinary market sentiment. multiple asset classes can provide an
period for global financial markets. effective counter to the challenges
Despite the best efforts of policymakers, described above. Our multi-asset portfo-
we believe inflation expectations lios are positioned for a steady but
Volatility is likely and inflation will remain subdued across developed uneven recovery, although prudent
is possible markets throughout 2021 and are diversification allows us to prepare for
We expect both monetary and fiscal unlikely to increase much until 2022 at all scenarios. Real assets such as
stimulus measures to continue deep the earliest, as economic weakness commodities, alongside Treasury
into 2021, but we do not have much and high unemployment continue to Inflation-Protected Securities (TIPS),
clarity about the pace of the global balance the effect of stimulus. There are favorable correlation diversifiers,
economic recovery. The speed at which is, however, a scenario in which central in our assessment, and can help
governments can overcome the banks and governments remain us to counteract the effects of any
COVID-19 pandemic, alongside the effi- cautious in the face of a surprisingly unexpected increase in inflation.
cacy of vaccines, will dictate how sharp economic recovery, maintaining Lower-volatility investments such as
stimulus is implemented and when the stimulus beyond the point that developed market government
pivot away from current levels of economic indicators would deem bonds, gold or high-quality stocks also
support will come. necessary, scarred by the damage form part of our portfolios should
incurred in 2020. volatility increase.
Commitment from central banks and
governments is still unquestioned at this These circumstances, taken together
point, but the outlook is not as trans- with rising consumer demand, may
The myth of TINA—look for
parent as we would like it to be. The mean inflation begins to increase sooner opportunities outside the obvious
concept of “lower for longer” interest than forecast, particularly in the United The stratospheric rise of growth equities
rates is well-established and should States. This would have a profound during 2020 has convinced many inves-
remain in place throughout 2021, impact on fixed income markets, as tors that a small number of
although the approach major central yields on long-term US Treasury bonds large-capitalization technology stocks
banks will take toward broader quantita- are currently very low, and the robust are the only way to grow investment
tive easing is more difficult to predict. performance of long-duration assets portfolios as we move into 2021. We
For example, there is an argument to was a feature of the early part of 2020 think this phenomenon, known as
suggest that the unprecedented support due to a flattening yield curve. This is “There Is No Alternative” (TINA), is
for “fallen angels” (i.e., companies unlikely to unwind completely in 2021, misguided despite the bifurcation and
previously rated as investment grade but the US Treasury yield curve has divergence seen between different
that have been downgraded to high already begun to steepen. Essentially, sectors within the equity asset class.
yield) will cease as the recovery gathers excessive stimulus, combined with the
pace. This was a powerful and unusual release of pent-up demand in a
4 2021 Outlook: Vulnerability and resiliency through upheavalWe are optimistic about the long-term Therefore, outperformance relative to We are also positioning our portfolios
return potential of equities and expect other equities is less likely in 2021, for opportunities in other assets that
to see opportunities arise for investment in our view. We expect to see opportuni- can benefit from economic recovery,
in undervalued stocks during 2021, ties in sectors that will benefit from including convertible securities (bonds
depending on how quickly and effec- a return to relative normality, particu- or preferred stocks that can be
tively global governments can deal with larly those where the expected decline converted into common equities) and
the ongoing COVID-19 pandemic. The in dividends did not materialize. short-duration investment-grade
so-called FAANG stocks (Facebook, credit. These assets can provide yield,
Apple, Amazon, Netflix and Alphabet) Utilities is an example of a sector that while also offering opportunities
saw robust performance throughout last we believe has reasonable absolute for capital growth, particularly in under-
summer, contributing to a situation in valuations but quite attractive relative valued sectors.
which the 10 largest companies listed valuations compared to other equities
on the S&P 500 Index made up more and fixed income. Utility companies
Policy missteps could dampen
than 25% of its market capitalization.1 typically offer consistent returns, not
dissimilar to bonds, and should benefit the recovery
Gains have begun to slow, as demon-
from any fiscal stimulus implemented The election of Joe Biden as US presi-
strated by the S&P 500 Equal Weight
in 2021 due to their key role in dent seems to have calmed financial
Index, which outperformed the broad
addressing climate change. The finan- markets, as investors enjoy some much-
S&P 500 Index (based on free-float
cials sector is another area in which needed clarity. The outlook for fiscal
market capitalization) during October
we see value, as stocks appear to be stimulus is still unclear though, and any
and November. This suggests a price
ready to re-rate following investor near-term support agreed by the US
correction, if not a full-scale rotation.
caution related to issues such as regula- Congress is likely to be smaller in scope
(Past performance is not an indicator or
tory oversight. Financial companies than desired by the Democrats.
a guarantee of future performance.)
are generally in a much better place
Aside from the delivery of emergency
It is difficult for any group of stocks to than in 2008, following the global
economic support, the incoming US
maintain earnings growth and expanding financial crisis, and should be part of
administration also has a mandate
multiples at the level experienced the recovery solution this time around,
to change the current approach in many
by this cadre of technology companies. rather than the problem.
policy areas, including international
relations, infrastructure, taxation and
THE FAANG EFFECT: LARGE-CAP TECH STOCKS OUTPERFORMED THE BROADER climate change, although a potential
US MARKET DURING THE SUMMER, ALTHOUGH THAT TREND BEGAN TO CHANGE
lack of control over the US Senate
LATER IN THE YEAR
makes it harder to implement the full
Performance of S&P 500 Index: Equal weight versus market cap-weighted
2010–November 12, 2020 wish list.
10
Failing to extend existing measures
designed to support the economy
5 risks killing a nascent recovery and
9/3/2020 –
11/12/2020 would, in our view, be a policy misstep.
4.39%
Implementation of new policies should
0
wait until the economy is demonstrably
post-pandemic.
-5
1/1/2020 –
9/2/2020
-12.27%
-10
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 YTD
Sources: Franklin Templeton, SPDJI, Macrobond. Indexes are unmanaged and one cannot invest in an index. They do not
include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future performance.
Important data provider notices and terms available at www.franklintempletondatasources.com.
2021 Outlook: Vulnerability and resiliency through upheaval 5ESG will define the post-COVID era
Michael Hasenstab, Ph.D.
Chief Investment Officer, Templeton Global Macro
At first glance, nothing ahead in 2021 each day of income destruction of 2021. The rate of growth during the
could be as bad as 2020. We have threatens lasting damage. Unfortunately, rebound is unlikely to sustain its magni-
been enduring the worst economic crisis near-term conditions are likely to tude in 2022 and the years that follow.
in 80 years and the worst global worsen before they ultimately improve. World gross domestic product (GDP)
health crisis in 100 years—events that growth will moderate to around 3.8% in
have profoundly damaged lives and Investment opportunities the 2022–2025 period, according to
livelihoods around the world. The are emerging IMF projections, with advanced econo-
International Monetary Fund (IMF) proj- mies averaging 2.2% and emerging/
From an investment standpoint,
ects that when we finally close the developing economies averaging 4.9%.4
optimism for the second half of 2021
books on 2020, the world economy Stimulus programs will eventually wane
should be counterbalanced with
will have contracted 4.4%.2 Fortunately, as governments that were already
caution over acute near-term risks,
as we flip the calendar to 2021, burdened with high debt levels before
in our view. The pandemic continues to
we are getting closer to a point at which the pandemic are forced to contend
destroy areas of economic activity,
the economic shocks of the past with limited fiscal space and deepening
resulting in substantial risks for a
year become prologue for the economic fiscal deficits. Debt-to-GDP ratios
number of financial assets. Broad
stories ahead. Global growth is have risen significantly in just about
disinflationary effects are likely to
projected by the IMF to expand 5.2% every country. Unorthodox policies
persist until economies return to full
in 2021, as economies improve from such as modern monetary theory and
mobility. We have been maintaining
the lows of the prior year.3 Promising debt monetization are likely to see
a cautious approach on risk assets in
vaccine trials have presented scenarios greater political interest in upcoming
anticipation of second waves of
for mass distribution by the spring years, increasing the risks for structural
COVID-19 in the fall and winter months.
of 2021, with the potential to drive the damage by imprudent governments.
COVID-19 pandemic into remission However, several longer-term investment The upcoming decade will be increas-
by the second half of the year. opportunities are beginning to emerge. ingly defined by quality of governance
Optimism for a return to better days We expect staggered timelines for when factors, in our view, both at the
abounds as 2020 draws to a close. certain investments may become suit- domestic level as well as geopolitically.
able given the wide variance in macro
Yet the current state of the pandemic In the US, debt levels are projected to
fundamentals and the divergent levels
paints a starkly harsher reality. Second exceed 100% of GDP over the next
of control over the spread of the virus in
waves of COVID-19 infections have decade with a fiscal deficit heading
specific countries. COVID-19 cases
surged exponentially in areas of Europe toward more than 5% of GDP by 2030.5
appear likely to reach a zenith during
and the US in the waning months of Monetary policy is projected to remain
the winter months before vaccine treat-
2020, compelling several regions to loose for the foreseeable future, with
ments may cause the pandemic to ebb
reinstate restrictions and lockdowns. the US Federal Reserve (Fed) antici-
in the late spring and summer of 2021.
Some of the roughest conditions of the pating near-zero-percent rates through
The timing and effectiveness of vaccine
entire pandemic are likely to be faced 2023, while it continues to provide
treatments will be the key determinant
in the final months of 2020 and the unlimited balance sheet support to
for economic activity and financial
first quarter of 2021. In the absence of financial markets. The Fed has also
asset valuations in the upcoming year.
a widespread remedy, economic hard- indicated a willingness to let the
ship will continue to deepen with each economy run hot in upcoming years to
month of restricted mobility and stifled Fiscal deficits and high levels of make up for several quarters of below-
economic activity. Time is the key debt present longer-term risks target inflation. Short-term US Treasury
factor for many people and businesses It is also crucial to map economic yields are likely to remain anchored by
teetering on the brink of insolvency — trajectories beyond the impulses monetary accommodation in the near
6 2021 Outlook: Vulnerability and resiliency through upheavalterm, but surging fiscal deficits, massive CUMULATIVE TOTAL RETURNS FOR COUNTRIES WITH POSITIVE ESG MOMENTUM
debt levels and rising reflation expecta- VS. NEGATIVE ESG MOMENTUM
tions should eventually drive term February 2018–September 2020
premiums higher. 6.0%
4.0%
2.0% 2.37
Geopolitical risks remain elevated
0.0% -0.40
Adding to the complexity of the current -2.0% -1.62
crisis is the precarious state of the -4.0%
world that existed before the pandemic. -6.0%
Heightened geopolitical tensions, rising -8.0%
nationalism and political polarizations -10.0%
have made it difficult for countries to -12.0%
find the collective goodwill needed to Feb 18 Jun 18 Oct 18 Feb 19 Jun 19 Oct 19 Feb 20 Jun 20 Sep 20
design collaborative solutions for shared
Positive momentum Negative momentum All countries
problems, both domestically and inter-
Source: Templeton Global Macro. To quantify the investment outcomes of our ESG research, we modelled our research results
nationally. COVID-19 has also enabled a in a rules-based index of government bonds that aimed to isolate the ESG inputs from other macro, valuation and risk
number of governments to enact over- factors. The construction of this index follows similar methods to those used in the construction of major fixed income
indexes. First, the entire fixed income universe is filtered for local currency government bonds, then several exclusion rules
reaching policies that would otherwise
are deployed to aggregate certain types of bonds and duration ranges that are consistent across different issuers.
be objectionable. Some regimes have By combining the resulting sets of bonds with our TGM-ESGI scores, we construct a portfolio of equal-weighted countries
drifted further toward authoritarian rule, with an improving TGM-ESGI, which can be viewed as an unbiased implementation of our ESG research outcomes in
portfolio form. This chart shows the return of the “positive momentum” countries as compared to the “negative momentum”
using the pandemic for political cover. countries and the entire set of countries. Past performance is not an indicator or a guarantee of future performance.
Additionally, the deglobalization trends
that existed before the pandemic fiscal imbalances, high levels of debt Tactically opportunistic for the
have accelerated, as countries have and external dependencies, have year ahead
increasingly turned inward to prioritize suffered greater damage. By contrast,
Overall, we anticipate being constructive
domestic concerns. Trade relations have countries that were in stronger funda-
in a number of regions as the world
been decaying among major economies mental shape before the crisis, with
transitions toward a post-COVID era.
in recent years. Structural shifts toward stronger institutions, lower levels of debt
However, near-term risks remain
domestic production and regional and more diversified economies, have
substantial. Regional lockdowns and
supply chains would have substantial generally fared better.
restrictions will likely continue to be
implications for the global economy and Widening income inequality in many needed in upcoming months to counter
financial markets in the years ahead. countries also remains a critical issue exponential spread of the disease.
that threatens to undermine economic Mobility restrictions will continue to be
ESG factors will shape the stability and intensify social discord. the most effective tool of virus suppres-
post-COVID world Damaged economies and elevated sion until a vaccine becomes broadly
unemployment from the pandemic have available. Until that point, lost incomes
Environmental, social and governance
only worsened several pre-existing and damaged aggregate demand will
(ESG) factors will play a major role in
structural problems. Countries that continue to have a detrimental impact
rebuilding the post-COVID world. Social
effectively address these challenges in on macroeconomic conditions. We
cohesion and good governance have
the years ahead can strengthen the expect perceived safe-haven assets to
the power to accelerate a country’s
underpinnings of their economies, while remain relevant during the extant
post-crisis recovery, or the lack thereof
those that neglect these factors risk months of a worsening pandemic, but to
can stymie it. Tragically we have seen
further instability. We expect ESG to be eventually diminish in importance as
the consequences of weak ESG factors
a defining attribute for global fixed medical advances incrementally beat
in specific emerging markets during
income markets in years ahead. back the disease. Looking ahead, we
the pandemic. Countries that were less
Countries that are projected to improve remain tactically opportunistic in
prepared for a health crisis due to
on ESG factors often present the stron- specific local-currency markets while
weaker health care systems and less
gest investment opportunities. continuing to manage near-term risks.
developed infrastructure, and/or less
We remain optimistic for the new year,
prepared for an economic crisis due to
and the potential eradication of
COVID-19.
2021 Outlook: Vulnerability and resiliency through upheaval 7From crisis to recovery—the road ahead
Sonal Desai, Ph.D.
Chief Investment Officer, Franklin Templeton Fixed Income
A strong rebound, but the CONSUMERS BUILDING FIREPOWER FOR FUTURE SPENDING
challenge is far from over US personal savings rate and average FICO score
October 2005–September 2020
I feel cautiously optimistic as I look
US personal savings rate (as % of disposable income)
to 2021—and “cautiously” is the
30%
operative word.
20%
The US economy has demonstrated a
remarkable resilience, showing it 14.8%
10%
still has the stamina to bounce back
from the COVID-19-induced recession.
As states eased lockdown restrictions ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’14 ’15 ’16 ’17 ’18 ’19 ’20
earlier this year, consumer spending
Average US FICO credit score 711
rebounded, driving a V-shaped recovery
710
in gross domestic product (GDP) and
employment. Fiscal and monetary
700
support has proved crucial, and the
benefits will continue to accrue: the 690
personal savings rate remains high, at
close to 15%, and households have
’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’14 ’15 ’16 ’17 ’18 ’19 ’20
improved their credit standing with
Sources: Franklin Templeton Fixed Income Research, U.S. Bureau of Economic Analysis, Fair Isaac Corp. As of September
average credit scores at their highest
2020 and July 2020 (FICO). Important data provider notices and terms available at www.franklintempletondatasources.com.
levels since records began in 2005—
building firepower for future spending.6
Navigating the path to recovery effectiveness in clinical trials. There
This recovery in spending and jobs Our Franklin Templeton–Gallup now seems to be a good chance that we
growth has already withstood two Economics of Recovery Study has could have a highly effective vaccine on
adverse shocks: the second wave of confirmed that Americans’ willingness the market by the spring.
COVID-19 contagion during the summer, to engage in a range of economic
The November US elections are now
and the expiration of the first extraordi- activities—from traveling, to visiting
behind us. While not all official results
nary fiscal support package in July. restaurants and shops, to working
have been determined at the time
This provides some optimism for how outside the home—has similarly proved
of this writing, it seems extremely likely
economic activity will respond to a resilient to the second and third
that Joe Biden will be the next presi-
potential winter seasonal surge in new waves of COVID-19 contagion; but it
dent. At the same time, however, the
infections. There has also been a also revealed that the launch of an
Democratic Party has seen its majority
positive trend of the contagion effective vaccine could prove essential
in the House of Representatives
becoming relatively more benign, with for a majority of people to feel comfort-
diminished, and Republicans may well
hospitalizations and deaths rising able enough to go back to fully normal
maintain their majority in the Senate,
less than new cases. This is partly patterns of behavior.
as long as they win at least one of
because more new cases involve
And the latest news on the vaccine front the two runoffs scheduled for January
younger and less vulnerable age
has been encouraging: shortly after in Georgia.
brackets, and also thanks to improved
knowledge on effective therapeutics. the US presidential election, pharma-
A divided government might bring some
ceutical companies Pfizer and Moderna
benefits for the economic outlook,
separately announced that their
by reducing the probability of major
vaccines have shown around 95%
8 2021 Outlook: Vulnerability and resiliency through upheavalchanges in policies and regulations that of skills, possibly tied to the fact that and under consideration, an earlier-
might otherwise risk having an adverse the COVID-19 recession has hit than-expected rebound in growth and
impact on the overall economy or on some sectors a lot harder than others. price dynamics cannot be ruled out.
specific sectors. Prolonged school closures might also
have significant adverse long-term I am not predicting a major rise in infla-
I expect additional sizable fiscal support effects. Remote learning has proved a tion, but even a moderate acceleration
measures to be passed between the very inferior substitute for in-person in price dynamics would be enough to
end of this year and the first quarter of education, especially for younger exceed the sanguine expectations of
2021. If the Republicans keep a students and particularly for those from most market participants and cause
majority in the Senate, the fiscal lower-income backgrounds; the long- further yield curve steepening in US
package might be somewhat smaller term damage in terms of lower skills, Treasuries over the course of 2021.
than was expected in a “blue sweep” reduced earning potential for the
scenario—where Democrats controlled Finally, the combination of large poten-
students and lower productivity for the tial macroeconomic swings with
the House and Senate along with economy might prove heavier than we
the presidency—but it would still be some long-term structural shifts trig-
currently realize. gered or accelerated by the pandemic
very significant.
These adverse consequences would be strengthens my view that active
A vaccine would also brighten the magnified if the country were to head asset selection based on high-quality
economic outlook in the rest of the into a new phase of widespread lock- fundamental analysis will be crucial to
world, notably in Europe where a resur- downs, which could also potentially any successful investment strategy.
gence of COVID-19 cases is currently result in a double-dip recession. Fixed income allocations will continue to
pushing several governments to play an important role in many investor
reimpose serious restrictions on social How policymakers manage the next portfolios as a diversifier, as well
and economic activity. several months therefore matters as a historically lower-volatility asset
a lot, not just for the immediate compared to equities. But from the
Cautiously optimistic recovery and the 2021 outlook, but perspective of credit, bottom-up selec-
also—and perhaps even more so—for tion has never been more important,
I said the operative word was
the longer term. We are thus still in my view.
“cautiously.” If the vaccines see their
heading into 2021 with a lot of uncer-
effectiveness and safety confirmed, Valuations are a concern in many
tainty, some massive economic
they will then have to be produced and sectors, as the market is not properly
imbalances and policy measures of
distributed at massive scale, which priced for the level of uncertainty.
unprecedented magnitude on both the
is no small challenge. Moreover, our We see no obvious areas of undervalu-
monetary and fiscal sides. It’s not
joint study with Gallup has shown that ation remaining; to the contrary, some
surprising that stock prices and bond
only between one-third and one-half sectors like commercial real estate
yields have already shown massive
of Americans would be ready to take a remain vulnerable. As a number of
swings in response to headlines on the
vaccine. Unless a large enough majority states will likely need to increase taxes
political or health care fronts.
of the population is willing to be to get their finances on a more sustain-
vaccinated, even a highly effective The market may also be underesti- able footing, the tax-free municipal
vaccine will not be able to rapidly mating the potential inflationary effect bonds sector will likely become an even
reduce contagion and allow economic of the unprecedented fiscal and mone- more valuable source of investment
activity to return to normal. tary stimulus and rescue packages, in opportunities. Non-US fixed income
addition to the likelihood of increased assets also present selected opportuni-
Meanwhile, even the very resilient US
in-sourcing and shifts in supply chains ties. The massive stimulus program
economy has suffered some significant
that may result from the current crisis in Europe, combined with the European
damage, some of which might prove
and ongoing tensions with trading part- Central Bank’s accommodative
long-lasting. Permanent job losses are
ners. (I believe tensions between the monetary policy, offers support for
up by 2.4 million since February and
United States and China are here to European government bonds.
account for nearly half of the increase
stay even with a change in US adminis-
in unemployment since then, even 2021 will be challenging, but it could
tration.) With the economy already
though job openings have already risen be equally rewarding.
demonstrating a healthy capacity to
above pre-COVID-19 levels.7 This might
rebound, and given the amount of fiscal
signal an emerging structural mismatch
and monetary stimulus already delivered
2021 Outlook: Vulnerability and resiliency through upheaval 9A year of lingering uncertainty, but ample
global opportunities
Stephen Dover, CFA
Head of Equities
The economic response to COVID-19 benefiting from the profound digital look to us to be in much better control
will continue to be the biggest uncer- transformation the global pandemic has of the coronavirus.
tainty stalking global equity markets in only pushed into overdrive, but also
2021. It is likely to continue weighing in several specific regional markets, Until the spread of COVID-19 is
on global economic activity and to keep like Japan and China, that may be reduced—probably once one or more
pressure on policymakers to produce beneficiaries of distinctive trends worth vaccines become widely available
programs that support economic activity watching in the coming year. later in 2021—the outlook for the world
until an effective vaccine is widely economy is likely to remain volatile.
available. And while we have received Certainly, we have been encouraged by
COVID-19 will be the main the snapback in economic activity
positive news regarding effective 2021 story
vaccines, widespread inoculation, espe- from the disruption the lockdowns
Now that the US election is largely over, caused in the spring of 2020, but the
cially in emerging markets, remains
we believe the focus for global equity recovery may be stalling, and global
some months off. The positive news on
investors heading into 2021 will be gross domestic product remains well
vaccines gives us comfort that
primarily on the economic effects of below where it was before the pandemic
COVID-19 will be contained, but the
the global pandemic’s progression. started. Many equity investors are
timeline remains uncertain.
Outbreaks continue to flare up in parts trying to look past the current economic
For global equity investors, however, we of Europe, the United States and and earnings disruptions toward longer-
see promise, not only in the sectors Latin America, while large parts of Asia term earnings growth.
THE IMPACT OF COVID-19 ON STOCK MARKETS SINCE THE START OF THE OUTBREAK
COVID-19 impact on stock markets
January 17, 2020–November 3, 2020
Price (local currency) indexed to 100
110
105
100
95
90
85
80
75
70
65
1/17/20 2/10/20 3/5/20 3/29/20 4/22/20 5/16/20 6/9/20 7/3/20 7/27/20 8/20/20 9/13/20 10/7/20 11/3/20
S&P 500 FTSE 100 DJ Industrial Average Nikkei 225
Sources: FactSet, S&P and Dow Jones Indices, FTSE Russell, Dow Jones, Nikkei. Indexes are unmanaged and one cannot invest in an index. They do not include fees, expenses or sales
charges. Past performance is not an indicator or a guarantee of future performance. Important data provider notices and terms available at www.franklintempletondatasources.com.
10 2021 Outlook: Vulnerability and resiliency through upheavalpressure during the pandemic, but we
Although COVID-19 will continue to be believe it could rebound strongly once
travel is safe again.
a major uncertainty in 2021, we believe
individual equity sectors and markets Finding opportunities in Asia
hold promise.” Regionally, we continue to see opportu-
nities in China and other emerging
markets, mostly in Asia. We expect they
The International Monetary Fund (IMF) Technology stocks should remain a key should rebound much more strongly
expects the global economy to beneficiary. The pandemic has only from the economic weakness of 2020
contract 4.4% in 2020, which is an accelerated several long-term secular than some of their developed market
improvement from its June forecasts trends in how people work, shop and counterparts. Asian economies in
following a strong rebound in activity in interact with others. We believe remote general have been well prepared for
the United States and Europe in the work and e-commerce will only become both the pandemic and the accelerated
third quarter.8 Next year, the IMF fore- more entrenched over the coming shift toward a more digital economy,
casts the global economy will grow decade, as technology companies in our view.
5.2%, with the uncertainty about continue to innovate and offer new tools
The IMF forecasts that emerging and
COVID-19 outbreaks and the potential to help manage this ongoing digital
developing economies overall are likely
for renewed restrictions creating more transformation. We would also expect
to grow at 6.0% in 2021 after a 3.3%
risks to the forecasts, in our view.9 any potential infrastructure bill from a
contraction in 2020.10 Emerging Asia is
That puts greater pressure on policy- new Congress and presidential
likely to pace the advance, according to
makers in the United States and administration to include some funds for
the IMF, with the region growing 8.0%
elsewhere to continue supporting their areas of technology such as 5G and
in 2021 and China posting an even
economies through fiscal stimulus. greater broadband access that could
faster 8.2% growth rate next year.11
further underpin this digitization story.
Encouragingly, we believe the victory of
Already, we have seen manufacturing
US President-elect Joe Biden could For those investors a bit squeamish
and services in China return to near
pave the way for some form of stimulus about the high valuations found in many
pre-COVID-19 levels as the government
deal to support short-term economic large technology stocks that have driven
has largely controlled the spread of
activity. A potentially split Congress, the US equity market higher over the
the coronavirus. We are aware of the
meanwhile, may create a positive back- past few years, we believe there are
host of political risks associated with
drop for US markets more broadly over plenty of opportunities in overlooked
investing in China but believe there are
the coming year, as a likely companies all over the world that are
plenty of interesting Chinese companies
divided Congress reduces the risk of benefiting from these same trends but
in the technology and old economy
major changes to the US tax code or trading at more attractive valuations.
sectors that are worthy of investment
to health care.
Other sectors such as health care and consideration. China’s latest five-year
consumer discretionary are also seeing plan also puts an emphasis on
Focusing on long-term themes some promising long-term secular self-sufficiency that may help boost
In a low growth, low interest-rate world, growth drivers. Within health care, we domestic industries over time.
we believe investors will continue to expect an aging global population and
look to global equity markets for attrac- Japan too may hold some promise, in
growing middle class to support demand
tive investment opportunities relative our opinion. The September 2020
for a range of medical services and
to other asset classes. And the trends election of a new prime minister,
treatments over the longer term.
that have driven equity markets higher Yoshihide Suga, could bring structural
since the start of the pandemic, such Consumer spending also may not reforms to the country in the areas
as digital transformation and innovation completely return to its old patterns of regional bank consolidation and
in the technology, health care and after the pandemic ends, with e-com- digital transformation. Moreover, we
consumer sectors, are set to continue, merce, for instance, becoming more believe Japanese corporations have
in our view. entrenched. Travel and leisure, mean- done a better job of improving their
while, is one area that is still under
2021 Outlook: Vulnerability and resiliency through upheaval 11balance sheets than investors have and pharmaceutical companies that are in our view. We believe this is a
given them credit for, which should in greater demand during the global trend that is likely to persist in 2021.
create opportunities for fundamentally pandemic. According to MSCI data as of
focused investors. September 30, 2020, financial and Regardless of how the coronavirus
energy companies made up about a progresses and what the broader
Within Europe, we are seeing a leader- quarter of the UK index, while health economic environment over the coming
ship change out of the United Kingdom, care was 40% of the Swiss market.12 year looks like, we think global investors
given the market’s large exposure A combination of low interest rates and should keenly focus on individual
to the financial and energy sectors, and weak oil prices has turned investors company fundamentals when making
toward Switzerland, with the latter away from industries like banks and oil long-term investment decisions.
market’s emphasis on the health care firms and toward those more defensive
growth areas such as pharmaceuticals,
Emerging markets: A strong year,
a stronger outlook
Manraj Sekhon, CFA
Chief Investment Officer, Franklin Templeton Emerging Markets Equity
2020 has been a testing year—literally stimulus policies pursued globally to that were better able to minimize
and figuratively—with terms such mitigate the effects of the pandemic. disruption during 2020, notably East
as “safe haven” acquiring new salience. In addition, inequality has been Asian emerging markets.
Across countries, sectors and compa- exacerbated globally both within and
nies there have been clear winners between countries, increasing the risks We expect COVID-19 to remain preva-
and losers from COVID-19, which in of political instability. Less susceptible lent in 2021—while the outlook
some instances have confounded expec- to these risks will be those countries for a vaccine is improving, production
tations. It is clear that key emerging
markets, particularly in East Asia, have EAST-WEST DIVIDE
substantially outperformed other coun- Total COVID-19 deaths per million people for select countries
tries in terms of health outcomes, As of November 13, 2020
economic impact and equity markets. Aggregate COVID-19 deaths per million people
0 100 200 300 400 500 600 700 800
Economies and markets globally have
thus far primarily been affected United Kingdom 750.2
by the first-order impact of COVID-19,
United States 732.4
including lockdowns and movement
restrictions, as well as near-term supply
EU 466.7
chain and consumption disruptions—
resulting in significant gross domestic
product (GDP) declines. South Korea 9.5
Over 2021, we expect the second-order China 3.3
effects of COVID-19 to become more
evident. These would include fiscal Taiwan 0.3
and monetary macroeconomic risks
resulting from the unprecedented Source: Our World in Data, European CDC—Situation Update Worldwide. Important data provider notices and terms
available at www.franklintempletondatasources.com.
12 2021 Outlook: Vulnerability and resiliency through upheavaland distribution in sufficient scale
are challenges equal to its development. The challenges of 2020 have highlighted
As such, we expect countries to
continue to experience sporadic COVID
structural advantages and other
outbreaks, which will add volatility beneficial secular trends in emerging
to the underlying trend of economic and
market recovery. markets that bode well for 2021. For
so many different markets across this
Gravitating toward strength
As recovery becomes more widespread
landscape to concurrently offer compelling
across emerging markets, led by investment potential, individually and
East Asia, this improves earnings visi-
bility, enabling a broadening of market
in aggregate, presents an exceptional
performance. Many companies have investment window, in our assessment.”
successfully executed during the
pandemic and should emerge out of the
crisis in a stronger competitive posi- markets is rising alongside increased positive impact on Indian technology
tion—and not only the commonly bond market flows as China is added to service providers. Largely ignored over
recognized COVID-19 winners. We international indexes. the last few years due to slowing growth
continue to closely monitor the pace of and margin pressures, the IT services
It is likely that with a new US adminis- sector has been supported by both
recovery in what we consider good
tration we’ll see a shift to a more higher client traction as well as struc-
quality companies that have corrected
constructive tone, although longer-term tural cost saving initiatives. The
significantly beyond the limited near-
strategic tension will remain. Regardless resurgence of manufacturing activity, as
term impact to their intrinsic value.
of this, the economic imperative India embarks upon indigenization and
East Asia remains well placed to lead for US companies to grow, develop and import substitution, as well as global
global markets. China is expected to be sell into—as well as source from— efforts to diversify supply chains could
alone in seeing GDP growth in 2020, China will ultimately drive US policy. drive demand across a range of product
underpinned by a diversified domestic categories, including electronics,
economy driven by innovation and digi- Next wave of recovery defense, automobile parts and pharma-
talization. We continue to see the The Association of Southeast Asian ceuticals. Normalization of credit stress
emergence of high-quality companies Nations (ASEAN) region and India have on the back of falling interest rates and
that are well-placed to benefit from lagged in terms of COVID-19 normaliza- improving liquidity should have a posi-
ongoing market consolidation and tion but are gradually re-opening, tive impact on banks, an area where we
booming domestic consumption. Taiwan with macroeconomic recovery supported maintain a positive outlook. Meanwhile,
and South Korea are beneficiaries of the by the favorable demographics of negative real rates in India will provide
structural growth in information tech- younger, less susceptible, populations. very significant support for the economy
nology (IT) hardware, as well as the The case for foreign direct investment is and markets going forward.
diversification of global technology being improved by regulatory change
supply chains. In Latin America, COVID-19 has accel-
and global supply chain diversification,
erated a trend of low interest rates and
while the significant scope for consump-
Geopolitical tension between China and digitalization. Simultaneously, a strong
tion growth from a low base also bodes
the United States remains a key global rebound in the manufacturing
well over the longer term.
headwind likely to persist irrespective of supply chain has boosted metal prices,
the US president. Although this is India has seen surging COVID infec- supporting the region’s mining industry
resulting in decoupling between the two tions, but with mortality having been after a long cycle of underinvestment
countries in the technology sector, contained, economic reopening has and weak currencies.
we have seen continued liberalization in continued. Although the disruption of
China’s financial markets, driving Brazil, despite the political noise, has
traditional business models has weighed
increased foreign ownership. Investor continued to focus on important
on some companies, we expect to see a
interest in China’s domestic A-share economic reforms that are leading to a
2021 Outlook: Vulnerability and resiliency through upheaval 13structural downward shift in its histori- aid in place to support those impacted to the new economy, should drive
cally high real interest rate. The central by lockdown measures could also continued strength next year. Laggards,
bank has also cut its policy interest impact economic recovery. including India and Brazil, will likely
rate to a record low, which reduces the benefit from a uniquely accommodative
cost of renegotiating or restructuring Even in South Africa, an emerging environment of negative real rates
loans, and could be a catalyst for market that has stagnated in recent (and an undervalued currency in Brazil),
longer-term credit growth. Credit pene- years, there is cause for optimism. The paired with ongoing reform efforts
tration in Brazil is far below many outlook is improving under President and excess capacity in the economy,
other markets, signaling room to head Cyril Ramaphosa, with announcements boosting growth.
higher in the coming years, supporting of a host of reform measures and
the prospects for the financials sector. redirection of public spending, including This broadening of economic recovery
More broadly, negative real rates will infrastructure projects, initiatives to should continue to drive improved earn-
provide structural support to Brazil’s support re-industrialization, spending ings visibility into 2021 and amounts to
growth outlook. We are also witnessing cuts (centered on a civil servant wage a compelling opportunity across
a long-term trend of “equitization” of freeze) and efforts to address corrup- emerging markets as a whole—both
investments that benefits participants in tion. There have, however, been false from a near-term tactical perspective as
the financial services industry. dawns before in the Rainbow Nation. well as structurally. For so many
different markets across this landscape
Challenges remain in Brazil, however, A better future to concurrently offer compelling invest-
including rising debt levels as a result of ment potential, individually and in
The challenges of 2020 have high-
stimulus measures, paired with uncer- aggregate, presents an exceptional
lighted structural advantages and other
tainty surrounding continued economic investment window, in our assessment.
beneficial secular trends in emerging
reforms amid a politically fragmented
markets that bode well for 2021.
environment. This may in turn place
The resilience of key markets in East
upward pressure on longer-term interest
Asia during the crisis, paired with their
rates. The planned end of emergency
ability to capitalize on secular shifts
Endnotes
1. Sources: SPGlobal.com, CompaniesMarketCap.com. Data as of 10/31/20.
2. Source: International Monetary Fund, World Economic Outlook, October 2020.There is no assurance that any forecast, estimate or projection will be realized.
3. Ibid.
4. Ibid.
5. Source: Congressional Budget Office, An Update to the Budget Outlook: 2020 to 2030, September 2, 2020.
6. Sources: Franklin Templeton Fixed Income Research, US Bureau of Economic Analysis, Fair Isaac Corp. As of September 2020 and July 2020 (FICO).
7. Sources: Franklin Templeton Fixed Income Research, US Bureau of Labor Statistics. As of October 2020.
8. Source: International Monetary Fund, World Economic Outlook, October 2020.There is no assurance that any forecast, estimate or projection will be realized.
9. Ibid.
10. Ibid.
11. Ibid.
12. Sources: FactSet, MSCI. Indexes are unmanaged and one cannot invest in an index. They do not include fees, expenses or sales charges. MSCI makes no warranties and shall
have no liability with respect to any MSCI data reproduced herein. No further redistribution or use is permitted. This report is not prepared or endorsed by MSCI. Important data
kprovider notices and terms available at www.franklintempletondatasources.com.
14 2021 Outlook: Vulnerability and resiliency through upheavalWHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. Bond prices generally move in the opposite direction
of interest rates. Thus, as the prices of bonds adjust to a rise in interest rates, the share price may decline. Investments
in foreign securities involve special risks including currency fluctuations, economic instability and political develop-
ments. Investments in emerging market countries involve heightened risks related to the same factors, in addition to
those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and
social frameworks to support securities markets. Such investments could experience significant price volatility in any
given year. High yields reflect the higher credit risk associated with these lower-rated securities and, in some cases, the
lower market prices for these instruments. Interest rate movements may affect the share price and yield. Treasuries, if
held to maturity, offer a fixed rate of return and fixed principal value; their interest payments and principal are guaran-
teed. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies,
particular industries or sectors, or general market conditions. Diversification does not guarantee profits or protect
against risk of loss.
Companies and/or case studies shown herein are used solely for illustrative purposes; any investment may or may not
be currently held by any portfolio advised by Franklin Templeton.
2021 Outlook: Vulnerability and resiliency through upheaval 15The year of less uncertainty,
more certainty
Francis A. Scotland
Director of Global Macro Research
Jack P. McIntyre, CFA
Portfolio Manager
Macroeconomic outlook: to Congress that the risks of too little economy. The pandemic will impact
Post-pandemic boom? fiscal stimulus are much greater economic activity through the first half
than too much. The vehicle for achieving of the year with a significant shift
A bevy of traditional macro-indicators
the Fed’s goal of higher inflation will in the second half. However, this impact
point to better global economic growth
be coordinated fiscal spending. This will not be linear across all economies.
for 2021. Some of these indicators
new regime is a politician’s dream It also will be a case of “it’s darkest
include the lagged influence of falling
come true. before the dawn,” as infection and
bond yields, the cumulative effect
mortality rates will remain elevated until
of past policy stimulus measures, the The only known-unknown standing in the vaccine implementation program
low level of energy prices, and high the way of this upbeat outlook is the becomes more widespread. However, we
household savings rates in China, the COVID-19 virus and how governments need to consider what scenario is
US, and Europe, which indicate and people react. However, promising already being reflected in bond market
pent-up purchasing power. Recoveries vaccine developments significantly sentiment. The Treasury market
already have been stronger than strengthen the case for a stron- appears to be looking into 2021 when
expected, but economic policymakers ger-than-expected recovery for the year. the vaccine will be readily available.
in the developed world want to cushion China has already demonstrated this The prior two times when hospitalization
any economic slippage caused by result. There, the authorities have effec- rates were in the vicinity of 60,000
new social isolation measures and tively gained control of the epidemic people there was a flight to safety bid in
remain laser-focused on supporting a through rigid compliance on social isola- Treasuries. Not this time, despite the
full recovery in employment. tion measures and extensive testing. hospitalization rate being at 100,000
Within the Chinese economy, many and likely to rise. This change signals
The pandemic has triggered a major
sectors have rebounded back to normal the Treasury market is more forward
regime shift, which also plays to a
while others are regaining momentum. looking and starting to discount 2021’s
stronger outlook, at least for the near
So advanced is the progress that normalization, aided by the widespread
term. For 40 years, the macro policy
China’s monetary authorities already distribution of the vaccines.
regime of the US was to guard against
are throttling back stimulus. If the
the return of inflation, work toward
vaccines prove to be effective, the The second key factor to figuring out
fiscal balance, and keep monetary and
world recovery by the end of next year the glide path for global bond markets
fiscal policy separate. That regime is
could be very surprising. involves expanding the uncertainty
over for the time being. Paul Volcker put
analysis to also include “political and
his stake in the ground nearly 40 years
Uncertainty subsides for economic” uncertainty. This factor is
ago with his announcement that the
global bonds more concentrated on the US but has a
Federal Reserve (Fed) would use the
global reach. In early January, we will
monetary aggregates to crush inflation. In determining where bond markets may
learn the outcome of the run-off Senate
Fed Chair Jay Powell has put his own head in 2021, there are three major
election in the state of Georgia, which
stake in the ground with the commit- developments to consider. First and
is critical to the US political and
ment to keep rates at zero until inflation right out of the gate is the remaining
economic agendas. When push comes
rises above 2% and his encouragement influence of COVID-19 on the global
16 2021 Outlook: Vulnerability and resiliency through upheavalUS COVID-19 HOSPITALIZATIONS VS.10-YEAR US TREASURY YIELD
As of December 03, 2020
Number of persons Percent
120,000 2.0
100,000
1.5
80,000
60,000 1.0
40,000
0.5
20,000
Jan 01 Jan 29 Feb 26 Mar 25 Apr 22 May 20 Jun17 Jul 15 Aug 12 Sep 09 Oct 07 Nov 04 Dec 03
2020
US: Currently hospitalized with COVID-19 (LHS) 10-year US treasury yield (RHS)
Sources: Brandywine Global, Macrobond, The COVID Tracking Project, SPDJI, ICE, Macrobond.
to shove, we will see an orderly polices. This expectation is drastically market volatility will remain low, which
transition of power at the White House different from the post-Global Financial will support the collective search for
in mid-January. Unlike President Crisis (GFC) experience when there yield in 2021. Marry this development
Trump, President-elect Biden is not was a collective rush to remove policy with a shortage of yield. There is now
known to “weaponize” uncertainty, stimulus. The use of “unorthodox” in excess of $17 trillion equivalent
so we expect to see overall political policies back then ignited a fear of of negative-yielding nominal sovereign
volatility diminish in 2021 and beyond. monetary induced inflation. However, bonds. The bottom line is fixed income
If the Senate remains under Republican it never happened. Central bankers securities that offer a risk- adjusted
control as expected, there will be have since changed their tune on infla- yield relative to this giant pool of
less “economic” uncertainty. Gridlock tion coming into 2021 with a more negative-yielding bonds will capture
will reallocate power to the “problem welcoming attitude toward higher outsized capital flows. Yes, spreads
solver” caucus, which is a group of prices. Unlike in the past, they won’t have already narrowed across most
centrist politicians. fight it. If market rates were to spike non-sovereign credit, but there will be
higher, we would expect an increase in more room to go. However, we expect
The third factor involves the global rhetoric on the potential use of yield the primary beneficiary of these capital
monetary policy front, where we curve manipulation, but we are not flows to be emerging market local
also expect to see less uncertainty due there yet. currency bonds. On a real-yield basis,
to two key influences. First, and they continue to look attractive outright
more important, is that inflation should What are the market implications of this and relative to developed market bonds.
not be a significant issue in 2021, “step function” lower in medical,
which will keep global monetary policy political, economic, and monetary policy
biased toward more accommodative uncertainty? It means that bond
2021 Outlook: Vulnerability and resiliency through upheaval 17You can also read
