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2021 GLOBAL OUTLOOK REASONS FOR OPTIMISM
REASONS FOR OPTIMISM 2021 GLOBAL OUTLOOK
A way forward — We believe global economic
Our macroeconomic views on 2021
growth will return to
pre-pandemic levels
—D
EREK HAMILTON, GLOBAL ECONOMIST sooner than expected.
Following 2020 — a year unmatched by any in recent memory — there
are reasons for optimism as we enter 2021. COVID-19 vaccines are being
distributed around the world and record amounts of stimulus continue to
support the global economic recovery. This optimism is reflected in our above-
consensus outlook for global growth in 2021, which we believe will return to
pre-pandemic levels sooner than expected, driven in part by pent-up demand.
Global inventories continue to be undersupplied and manufacturing is likely
to be supported in the coming months as companies ramp up capacity
toward more normal levels. While the pressure from inventory restocking and
consumer demand will likely bring a temporary spike in the inflation rate, we
expect global inflation to remain muted. Current excess capacity in the global
economy is extremely large. We expect excess capacity to close rather quickly
relative to other recoveries, though inflation typically lags that process by a
couple of years.
Major global central banks appear ready to keep rates low for an extended
period and will likely continue to pursue a range of programs to ensure the
global economy continues to heal as the pandemic recedes. Both the Federal
Reserve Bank (Fed) and the European Central Bank (ECB) are considering
ways to pursue their mandates more effectively, by extending their focus to
areas like climate change and inequality.
The focus on climate change and inequality is not just limited to central banks,
as both the European Union (EU) and the Biden administration have made
these issues focal points for their legislative agendas. We believe investment
trends focusing on Environmental, Social and Governance (ESG) factors
will continue to accelerate and the market for “green finance” will grow in
importance in coming years.
We expect broad U.S. dollar weakness to continue in 2021 and believe we are
entering a cycle that will see it decline moderately for the next three to four
years. The weakening dollar combined with low rates should support emerging
market economies.
Vaccination campaigns should begin to have a positive impact on economic
growth in the developed markets and China in the spring of 2021, while the
impact may not extend fully into emerging markets until later in the year.
3
2021 GLOBAL OUTLOOK REASONS FOR OPTIMISM
The Fed will likely maintain GLOBAL GDP REBOUNDS IN 2021
10%
its current stance on static
interest rates. 5%
0%
-5%
Source: Ivy Investments. Chart shows estimated 2020
and 2021 annual gross domestic product growth (GDP)
based on purchasing power parity. GDP growth forecasts -10%
are current through January 2021 and are subject change
at any time based on market and other conditions. No ■ 2020 (estimate) ■ 2021 (estimate)
forecasts can be guaranteed. Past performance is not a -15%
guarantee of future results. Global Japan Eurozone U.K. U.S. China India
U.S. — OPPORTUNITY TO SPEND FUELS GROWTH
We anticipate 2021 U.S. economic GDP growth will average 6.2%,
fueled in part by a resurgence in consumption as pandemic-related
constraints wane. In 2020, consumers had the means but not the
opportunity to spend, resulting in an above-average savings rate.
Another round of fiscal stimulus is set to hit in early 2021, which
should further bolster consumer pocketbooks.
STIMULUS BOOSTS U.S INCOME RELATIVE TO SPENDING,
KEEPS SAVINGS RATE HIGH
$20.0
$17.5
USD trillion
$15.0
$12.5
$10.0
■ DPI ■ PCE ■ Savings Rate
35%
30%
% of savings
25%
20%
Source: Ivy Investments, Macrobond. Chart shows
aggregate 2020 U.S. disposable personal income 15%
(DPI), personal consumption expenditures (PCE) and 10%
savings rates. Past performance is not a guarantee 5%
of future results. Jan-2020 Nov-2020
With regard to monetary policy, we believe the Fed will maintain its
current stance on static interest rates for the next several years.
Following its 18-month-long Monetary Policy Framework Review,
the U.S. central bank announced last August that going forward, it
would have a more granular focus on employment, as well as take
a more symmetrical approach to its 2% inflation target.
4
REASONS FOR OPTIMISM 2021 GLOBAL OUTLOOK
With the Fed now committed to considering the unemployment rate for Broad bipartisan support
different racial and ethnic groups and willing to tolerate inflation
moderately above its 2% target to make up for persistent misses to the
to stop China’s unfair trade
downside, we believe it will let the U.S. economy “run hot” before hiking practices may lead to
rates again. In addition, the Fed is likely to continue its asset purchases “Buy American” legislation.
for some time.
DISPARITY IN U.S. EMPLOYMENT PICTURE
22.5%
— Total — Black or African American — Hispanic or Latino — White — Asian
20.0%
17.5%
15.0%
% of unemployment
12.5%
10.0%
7.5%
5.0%
2.5%
0.0% Source: Ivy Investments, Macrobond. Chart shows U.S.
1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020 unemployment rates by race, 1980 – 2020.
With President Joe Biden and his administration taking the reins of power
in Washington, we anticipate policy changes on several fronts. Regarding
China, we believe Biden is likely to be less confrontational than former
President Donald Trump. However, relations with China will be different
than they were under the Obama administration. There is broad bipartisan
support to stop China’s unfair trade practices, which may open the door to
a compromise on “buy American” legislation. Biden may pursue a harder
line on human rights, but we expect the new administration to gradually
move away from tariffs and strengthen ties with our traditional allies to
reengage in a multi-lateral approach to foreign policy to influence countries
like China and Iran.
One key difference between the Trump and Biden administrations will be
the latter’s focus on climate change. Biden has named former Secretary of
State John Kerry to the new position of special presidential envoy for
climate. He will be a cabinet-level official and sit on the National Security
Council. Kerry played an instrumental role in the establishment of the Paris
agreement on climate, so it wasn’t a surprise that one of President Biden’s
first actions was to bring the U.S. back into the accord. Domestically, the
Biden administration has several options to advance its climate goals, such
as requiring public companies to disclose climate risks and protecting public
lands. Longer term, Biden may override Trump rules on methane emissions
and implement more stringent rules on coal power plants. On the legislative
front, there is bipartisan overlap on policies around energy storage, carbon
capture, nuclear power and renewables. Tax credits for clean and renewable
energy programs, as well as increased funding for clean technology research
and development also are areas of potential agreement.
5
2021 GLOBAL OUTLOOK REASONS FOR OPTIMISM
The EU has aimed part of its Even though the Democrats narrowly control the Senate, we expect a
number of legislative victories in 2021. President Biden has proposed a
pandemic recovery efforts at $1.9 trillion stimulus package, which includes additional checks to
addressing climate change. individuals, an extension of emergency unemployment benefits and help
for state and local governments. Biden has said he hopes to pass this
proposal on a bipartisan basis, which would require 10 Republican
senators to support it. We expect negotiations will lead to the passage of a
bill of about $1 trillion, which should lend further support to the outlook for
consumption. Later in the year, we expect broader legislation to pass that
could include a number of spending initiatives, including an infrastructure
plan with a focus on green initiatives. We also expect the legislation to
include higher taxes for businesses and high-income earners.
EUROZONE: POISED FOR A GREEN REVOLUTION
We believe climate change will also be a major area of focus for the
eurozone in 2021. The EU has aimed a large part of its pandemic recovery
efforts, in the form of the Recovery & Resilience Facility (RRF) of its
NextGenerationEU plan, at addressing climate change and driving a
green revolution. We believe the debt issued to fund the RRF will play an
important role in developing the “green” bond market, which is growing
rapidly as investors increasingly turn their focus to ESG factors. ECB
President Christine Lagarde has stated the central bank will consider
whether it should include green bonds in its asset purchase program. We
view this as a likely additional source of demand in a growing market.
The NextGenerationEU plan is the EU’s first common countercyclical
fiscal response. Unlike previous aid programs, NextGenerationEU has
no austerity requirements. Furthermore, the money will be distributed
based upon economic factors, including the damage done by COVID-19.
EU STIMULUS TARGETS WEAKER ECONOMIES,
BENEFITS PERIPHERAL COUNTRIES
6.0%
4.8%
3.6%
% of GDP
2.4%
1.2%
Source: Ivy Investments, Macrobond. Chart shows
expected EU grants as a percentage of GDP in key EU
economies, 2021–2027. Past performance is not a 0.0%
guarantee of future results. Germany France Italy Spain
6REASONS FOR OPTIMISM 2021 GLOBAL OUTLOOK
The first round of aid is set to hit in the second half of 2021, with the bulk
of the money hitting in 2022–2024.
We believe the recovery in Europe will be similar to the U.S. rebound.
Governments across the eurozone provided a significant amount of
stimulus, with most major countries agreeing to pay a portion of
employee wages if the workers are kept on companies’ payrolls. As a
result, savings rates spiked across the continent.
The winter reemergence of spiking COVID-19 cases not only has extended
government-induced lockdowns but caused lockdown mandates to be more
severe in some countries. We believe this will cause weaker-than-expected
economic growth in the first quarter of 2021. However, as the global
recovery takes hold later in the year, the eurozone’s leverage to global
manufacturing and ongoing stimulus efforts should support economic
growth, which is why we forecast eurozone GDP growth at 5.0% for 2021.
Similar to the Fed, the ECB is undergoing its own strategic review that
is set to conclude in mid-2021. We believe the ECB will elect to make its
own inflation target (“below, but close to 2%”) more symmetrical,
allowing inflation to move above 2%. We view it as less likely that the
ECB will actively target inflation above 2% in a “makeup” strategy like
the Fed. Nevertheless, like the Fed, this change would allow the ECB to
wait longer before beginning to raise rates. We expect asset purchases
to continue into 2022.
72021 GLOBAL OUTLOOK REASONS FOR OPTIMISM
A major focus in China’s CHINA, EMERGING MARKETS: SET FOR QUICK RECOVERY
Emerging market economies should continue to perform, supported
economic development going by a softer dollar, continued low interest rates and global Purchasing
forward will be the “dual Manager’s Indexes (PMIs) that are moving higher. Inflows into
circulation” strategy. emerging market funds continue to be strong, but a slowdown in
Chinese credit growth could prove to be a headwind for emerging
markets late in 2021 and into 2022.
We expect China to see 2021 GDP growth of 9%, which is one of our
highest economic forecasts for the year. China was very aggressive in
its response to the COVID-19 pandemic, which has allowed the country
to return to “normal” more quickly than the rest of the world. While this
lessens the economic “snapback” China will experience compared to
other countries, Chinese consumption still has room to catch up.
On the policy front, the People’s Bank of China (PBOC) has been careful
not to allow financial conditions to tighten. While we do not expect the
PBOC to raise rates, we do think the flow of credit will be the key lever
allowing policy to normalize. We expect China to reduce the flow of credit
next year. Historically, this has pressured global trade, commodity prices
and emerging markets in general. However, the global recovery will likely
limit these headwinds for a time. We will be monitoring this situation
closely once the global economy experiences its post-COVID recovery.
A major point of focus in China’s economic development going forward
will be the “dual circulation” strategy that President Xi Jinping announced
in 2020. We believe this will be the foundation for the country’s 14th
five-year plan, which will likely be approved at the National People’s
Congress in March 2021.
Dual circulation encompasses two aspects: internal circulation and
external circulation. Internal circulation is the supply and demand
functions driven by domestic demand, with the demand coming from
Chinese household consumption and the supply coming from Chinese
technology and industrial development. External circulation refers to
external trade and will only be used to support internal circulation. We
believe China will focus on three key areas to implement the dual
circulation strategy: urbanization, “make local” focus on manufacturing
and sourcing, as well as technology and industrial upgrading.
Urbanization will continue to be a key focus of China’s policy to increase
potential economic growth and will focus increasingly on mega-city
clusters. With the labor force shrinking, productivity growth becomes
even more important and moving rural farmers into the urban workforce
increases productivity. This urbanization push will likely mean increased
spending on infrastructure and technology within the mega-city clusters.
It is likely to continue supporting the property markets, even though the
demographic peak has passed. Urbanization rates in China are still
significantly below the average for developed markets, so there is a long
runway for growth in this area.
8REASONS FOR OPTIMISM 2021 GLOBAL OUTLOOK
The “make local” leg of the strategy will be the beginning of a pivot A vaccine-related health or
away from China’s dependence on imports, and energy will be a key
focus. As China tries to reduce the share of coal in its energy usage, it
production scare could delay
will likely further accelerate its move toward alternative energy. To this the economic recovery.
end, Xi announced a series of energy independence goals, which
include sourcing 20% of its primary energy use from non-fossil fuels by
2030 at the latest. Longer term, China will target zero net carbon
emissions by 2060.
The technology and industrial upgrade leg of the strategy is China’s
attempt to wean itself from imports of technologies due to the perceived
risk the supply of key inputs could be halted. Semiconductors are a
prime component of this goal and China’s focus is evident in its ten-fold
year-on-year increase in investment in the chipmaking industry in the
second quarter of 2020 alone. China also aims to increase the density
of robots in its manufacturing industries, which will also help it achieve
great productivity.
In India, we expect a sharp snapback in economic growth, with GDP
growth forecast at 9.2% in 2021. While the government has been less
generous with stimulus versus other countries, the economy has shown an
ability to quickly recover from the COVID-related shutdowns earlier in the
year. While statistics are sparse, there is evidence of a buildup in savings
like in other countries. We believe the country’s captive pharmaceutical
sector will result in a plentiful supply of vaccines. This should allow the
country to see a strong recovery in 2021.
WILDCARDS WE’RE WATCHING
Despite our positive outlook on 2021, we are mindful of risks on the
horizon. First among these would be the COVID-19 pandemic itself.
Nearly 90% of the global population lives in the northern hemisphere,
which is currently in the middle of its cold and flu season. With the
resurgence of virus cases forcing governments, both in the U.S. and
Europe, to reimpose lockdowns and restrictions during the holiday
season, could delay the economic recovery by a few months.
With vaccines being the key to allowing people and governments to feel
comfortable with a return to “normal” life, a vaccine-related health scare
or problems related to the production or distribution of vaccines could
cause the recovery to be pushed out as well.
Finally, will the tremendous amount of stimulus that was injected into
the global economy generate an inflation surprise that spooks a central
bank into an expansion-crimping preemptive tightening? We think
central banks will be slow to act, especially with their renewed focus on
supporting employment and new flexibility on inflation targets.
910
BEGINNING OF A NEW CYCLE 2021 GLOBAL OUTLOOK
The beginning of a new cycle –
Our 2021 market outlook
— DANIEL P. HANSON, CFA, CHIEF INVESTMENT OFFICER
As we enter 2021, we take stock of the current environment and outlook for
investors. Rather than take an approach of announcing predictions, which
can be provocative, we continue on our longstanding approach: to lead with
observations and detailing possible implications for investors. Our objective is
to focus on the opportunities and issues at hand as an active investor.
10 observations
1 FOLLOWING THE SHARP ECONOMIC DOWNTURN
IN 2020, THE STAGE IS SET FOR A BROAD RECOVERY
2 WITH INTEREST RATES NEAR 40-YEAR LOWS,
ANTICIPATE MODEST FIXED-INCOME RETURNS
3 DISPARATE RETURNS IN 2020 MAKE
THE CASE FOR ACTIVE INVESTING
4 MARKET TIMING WAS PARTICULARLY
COSTLY IN 2020
5 CYCLES MATTER
6 SECULAR TRENDS REQUIRE CONSIDERATION,
BUT SO DOES PRICE
7 ESG IS MORE THAN A BUZZWORD
8 THE COVID-19 PANDEMIC CONTINUES
TO GRIP THE WORLD IN 2021
9 IT’S STILL NECESSARY
TO EXPECT THE UNEXPECTED
10 MARKETS ARE AT ALL-TIME HIGHS, AND WHILE
THERE IS FROTH, THERE IS ALSO OPPORTUNITY
112021 GLOBAL OUTLOOK BEGINNING OF A NEW CYCLE
We are at the threshold
of a new economic and
1 FOLLOWING THE SHARP ECONOMIC DOWNTURN
IN 2020, THE STAGE IS SET FOR A BROAD RECOVERY
The longest bull market on record abruptly ended in 2020 as the global
market cycle. economy and markets plunged into a swift global recession triggered by
the global pandemic.
Since the end of World War II, economic recoveries have been
commensurate to the preceding downturn. This recession was unique
in terms of severity and duration. The abrupt halt to global economic
activity was unprecedented. The negative $40 WTI oil price in April
2020 personifies the extreme nature of the global economic freefall,
as does the impact on global supply chains.
OIL PRICES RECOVER FROM APRIL FREEFALL
$80
$61.14
$60
$48.35
$40
Dollar per barrel
$20
$0
$-20
Source: Ivy Investments, Factset. Chart shows 2020 oil $-36.98
prices as measured by WTI Crude. Past performance is $-40
not a guarantee of future results. Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20
EXTRAORDINARY DECLINE IN GLOBAL ACTIVITY
60
— Manufacturing PMI Suppliers’
Delivery Times Index
55
50
Source: Ivy Investments, Macrobond. Chart shows the
time for suppliers to deliver goods to end users and the 45
disparity in deliveries as measured by the Manufacturing
PMI Suppliers’ Delivery Times Index, 1998–20. The
Manufacturing Purchasing Managers’ Index (PMI) is a 40
measure of the prevailing direction of economic trends
in manufacturing and is based on a monthly survey
of supply chain managers across 19 industries. Past 35
performance is not a guarantee of future results. Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20
Talk of broad market bubbles, on the other hand, is not warranted. We
believe 2020 clearly marked the beginning of a new economic and market
cycle. The prompt response of record stimulus around the globe is
effectively bridging the gap from shutdown to an eventual reemergence.
12BEGINNING OF A NEW CYCLE 2021 GLOBAL OUTLOOK
2 WITH INTEREST RATES NEAR 40-YEAR LOWS,
ANTICIPATE MODEST FIXED-INCOME RETURNS
The current interest-rate
environment means, for most
10-YEAR YIELDS CONTINUE CHOPPY TREND
investors, equities may make
18%
more sense than fixed income.
16%
14%
12%
10%
8%
6%
4%
2%
Source: FactSet. Chart shows 10-Year U.S. Treasury yields,
0% 1980–2020. Past performance is not a guarantee of
Dec-80 Dec-84 Dec-88 Dec-92 Dec-96 Dec-00 Dec-04 Dec-08 Dec-12 Dec-16 Dec-20 future results.
With interest rates near multi-decade lows, investors should expect very
modest returns from fixed income investments. The expectation for
bond investors should simply be the coupon, which at this point is
negligible. Real bond yields, after accounting for inflation, are negative
in the U.S., and low rates reflect both accommodative policy globally and
the lack of inflationary growth. The mantra “Don’t fight the Fed” still
seems appropriate, as domestic and foreign monetary and fiscal policies
remain committed, and able, to support growth. The Fed has explicitly
stated it will remain accommodative for an extended period.
U.S. and global equities are relatively attractive in comparison to bonds.
Using the inverse of the price-to-earnings ratio and forward E/P ratio, the
earnings yield of the S&P 500 Index is roughly 4% higher than current
10-year U.S. Treasury yields. Meanwhile, there are $17 trillion of global
bonds with negative yields.
EQUITIES VS. FIXED INCOME — A COMPELLING ARGUMENT
8%
— Relative Earnings Yield — 20-Year Average
6%
4%
2%
0%
-2%
Source: Ivy Investments, Factset. Chart compares relative
S&P 500 Index earnings yield to 10-Year U.S. Treasury
-4% yields, 1995–2020. Past performance is not a guarantee
Dec-95 Dec-00 Dec-05 Dec-10 Dec-15 Dec-20 of future results.
132021 GLOBAL OUTLOOK BEGINNING OF A NEW CYCLE
More than 25% of global $17 TRILLION OF GLOBAL BONDS WITH NEGATIVE YIELDS
$20
investment-grade bonds
have yields below zero.
$15
Trillions, USD
$10
$5
Source: Bloomberg. Chart shows yields of global bond as
measured by Bloomberg Barclays Global Aggregate Bond
index, 2016–2020. Past performance is not a guarantee $0
of future results. Jan-16 Jan-17 Jan-18 Jan-19 Jan-20
Source: Morningstar. Data show performance as of Dec. 31,
2020 for the following: Large Cap Value, as represented by the
3 DISPARATE RETURNS IN 2020 MAKE
THE CASE FOR ACTIVE INVESTING
All investing is active investing. Picking your spots, whether asset
Russell 1000® Value Index, which is a float-adjusted market
capitalization weighted index that measures the performance allocation, index and market exposures, or specific stocks, are likely
of the large-cap value segment of the U.S. equity universe; to have an impact on returns.
Large Cap Core, as represented by the S&P 500® Index,
which is a float-adjusted market capitalization weighted index Last year’s market returns reflected differentiated performance and
that measures the large-capitalization U.S. equity market;
Large Cap Growth, as represented by the Russell 1000® fundamentals, and we would argue investors behaved rationally both
Growth Index, which is a float-adjusted market capitalization during the drawdown and the subsequent recovery. We’re most
weighted index that measures the performance of the large- interested in the differentiated fundamentals and their drivers. Some
cap growth segment of the U.S. equity universe; Mid Cap
Value, as represented by the Russell Midcap® Value Index, businesses grew and accelerated, while others contracted and were
which is a float-adjusted market capitalization weighted index stopped dead in their tracks. Many digitally savvy, asset-light business
that measures the performance of the mid-cap value segment
of the U.S. equity universe; Mid Cap Core, as represented by models saw accelerating growth in the COVID lockdown economy, as
the Russell Midcap® Index, which is a float-adjusted market they added real value for their customers while favorably impacting
capitalization weighted index that measures the performance long-term customer behavior. By contrast, cyclical, asset-intensive
of the mid-cap segment of the U.S. equity universe; Mid Cap
Value, as represented as the Russell Midcap® Growth Index, businesses with a challenged opportunity for revenue growth were faced
which is a float-adjusted market capitalization weighted with distress. While many growth-oriented businesses have benefited
index that measures the performance of the mid-cap growth
segment of the U.S. equity universe; Small Cap Value as from recent trends and reached new all-time highs due to these strong
represented by the Russell 2000® Value Index, which is a tailwinds, returns for value-oriented styles are barely above
float-adjusted market capitalization weighted index that pre-pandemic peaks, reflecting laggard underlying fundamentals.
measures the performance of the small-cap value segment
of the U.S. equity universe; Small Cap Core, as represented
by the Russell 2000® Index, which is a float-adjusted market WIDE DISPERSION OF RETURNS AMONG STYLES AND SIZE
capitalization weighted index that measures the performance
of the small-cap segment of the U.S. equity universe; Small Value Core Growth Value Core Growth
Cap Growth, as represented by the Russell 2000® Growth
Index, which is a float-adjusted market capitalization Peak-to-Trough (%) Prior Peak-to-Present (%)
weighted index that measures the performance of the small-
cap growth segment of the U.S. equity universe. It is not Large Cap -38.3 -34.6 -31.5 1.3 14.8 26.8
possible to invest directly in an index. Past performance is
not a guarantee of future results. Mid Cap -43.7 -40.3 -35.7 2.7 12.7 26.8
Small Cap -44.7 -41.7 -40.4 4.0 17.3 28.1
14BEGINNING OF A NEW CYCLE 2021 GLOBAL OUTLOOK
4 MARKET TIMING WAS PARTICULARLY
COSTLY IN 2020
Missing the best five days
of 2020 saw returns
We believe market timing is always dangerous. Sticking with a
fundamental, long-term, disciplined approach is a key way to plummet 17.9%.
compounding returns through volatile periods.
The aphorism “It’s time in the market, not timing the market,” remains
true as a key to compounding long term returns and 2020 was no
exception. The S&P 500 Index returned over 18%, including dividends,
during the year. Missing just the two best days would have left investors
with a total return of -1%, while missing the five best days would have
left investors almost 18% poorer than where they began the year.
The S&P 500 Index has returned about 7.5% annualized over the last
20 years, including dividends. Investors who missed the best 20 days
during that period saw those returns drop to a paltry 0.5%. Missing the
best 40 days reduced the total annualized return to -3.6%. Sticking
with a fundamental, long-term, disciplined approach is a key way to
compound capital through volatile periods. Having a clear investment
philosophy and process is vital to maintain conviction and
participation in markets during times of uncertainty.
COST OF MISSING THE MARKET IN 2020
30%
20%
18.4%
10%
8.2%
0%
-1.0%
-10%
-17.9% Source: Ivy Investments, Morningstar Direct. Chart shows
-20% average 2020 returns of the S&P 500 Index as of Dec.
31, 2020. The S&P 500 Index is a float-adjusted market
-30% -33.0% capitalization weighted index that measures the large-
capitalization U.S. equity market. It is not possible to
-40%
invest directly in an index. Past performance is not a
2020 Return Missed the Missed the Missed the Missed the guarantee of future results.
best day best 2 days best 5 days best 10 days
152021 GLOBAL OUTLOOK BEGINNING OF A NEW CYCLE
We believe some of last
year’s disruption is likely
5 CYCLES MATTER
Recovering from last year’s sharp downturn marks a V-shaped recovery
to continue in 2021. in global economic activity and corporate earnings continuing into 2021
and beyond. Some market observers have referred to this market as “the
bubble of all bubbles.” We do not. While there has been much debate as
to the shape of recovery — though the front end usually looks V-shaped
— we believe we are at the beginning of a new cycle.
As we’ve noted, the need to rebuild global inventories is likely to
provide a sustained tailwind to economic growth well into 2022.
Ports in key shipping lanes are booked solid, which bodes well for
maritime and rail traffic.
GLOBAL INVENTORIES REMAIN LEAN
100% 20
— % Contracting — Global Industrial Production
90% 15
80% 10
70% 5
60% 0
Source: Ivy Investments, Macrobond. Chart shows global 50% -5
industrial production and the number of countries with
declining inventories by percentage, 2008–2020. The 40% -10
Manufacturing Purchasing Managers’ Index (PMI) is a
measure of the prevailing direction of economic trends 30% -15
in manufacturing. The PMI is based on a monthly survey
of supply chain managers across 19 industries. Past 20% -20
performance is not a guarantee of future results. 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
U.S. consumers are in a strong position compared to prior recoveries,
with healthy balance sheets and improving income. A willingness
to spend exists, the inability to spend during the lockdown has been
a key constraint.
Further demand exists for both goods and services. Fifteen years after
the 2006 peak in housing, the housing cycle again appears favorable.
Strength in housing could have a multiplier effect on economic activity,
and positive home price appreciation could drive wealth effects.
16BEGINNING OF A NEW CYCLE 2021 GLOBAL OUTLOOK
6 SECULAR TRENDS REQUIRE CONSIDERATION,
BUT SO DOES PRICE
Awareness and management
of ESG issues is a requirement
High quality business models that thrived in 2020 are likely to
continue to do so in 2021. However, this is already reflected in stock for investors, businesses
prices in many cases so active management of portfolios is key to and governments.
balance upside and risk.
Digitization and asset-light businesses, which accelerated during the
lockdown, are here to stay and are increasingly dominating the
economy and markets. To that end, history suggests some of these
companies could continue to grow beyond current expectations while
others will be unable to fend off eventual disruptors.
There are currently areas of enthusiasm and froth in the market, as
evidenced in brisk IPO activity fueled by frenzied Special Purchase
Acquisition Company (SPAC) issuance and returns, the likes of Tesla
and Bitcoin, as well as general retail investor sentiment and activity.
SPACs, operating as blank check companies, raised roughly $83 billion
in 2020. The previous record was $13.9 billion.¹ ¹ Source: https://spacinsider.com/stats/
Some sectors of the market do have valuations that are quite demanding,
and we would certainly expect some rebalancing of valuations. This does
not undermine the broader underlying fundamentals of the market,
which we believe is very investable at current valuations.
OPPORTUNITIES REMAIN DESPITE SECULAR TRENDS, VALUATIONS
Value Core Growth Value Core Growth
Revenue Growth (%) (YoY) P/E — Next 12 Months
Large Cap -6.3 -2.4 8.9 18.0 23.0 31.3
Mid Cap -7.9 -5.3 6.1 18.3 22.6 39.1 Source: Factset, as of Dec. 31, 2020. Please see the
disclosure on page 14 for a listing and definitions of the
Small Cap -7.2 -4.9 2.4 17.9 30.0 76.2 indexes represented in this table. Past performance
is not a guarantee of future results.
7 ESG IS MORE THAN A BUZZWORD
We believe ESG is much more than a popular corporate and investment
trend. For us, awareness and management of these issues are a
requirement for investors, businesses and governments.
For example, calls for greater oversight of Big Tech companies have
increased significantly worldwide. Many of these leading companies,
with asset light business models and strong profitable growth, are
attracting antitrust and regulatory scrutiny. From China to the U.S., we
believe this type of attention is not likely to go away anytime soon, and
that the antitrust scrutiny is more reflective of strong business models
and market power. As this regulatory pressure intensifies identifying
management teams committed to protecting a company’s social license
to operate becomes more crucial for active investors.
172021 GLOBAL OUTLOOK BEGINNING OF A NEW CYCLE
Calls for greater scrutiny Likewise, scrutiny on environmental practices and carbon intensity
specifically remains at the center of public debate. Increased awareness
of Big Tech have intensified. of what were previously considered externalities are now front and center
for business, investors and governments globally. We believe that it is
clear that investors and business leaders who show leadership regarding
management of material ESG issues can add meaningful value.
INVESTOR INTEREST IN ESG GAINS SPEED
100%
80%
60%
40%
20%
Source: Google. Chart shows consumer search trends on
environmental, social and corporate governance (ESG)
investing topic, 2017–2020. Past performance is not a 0%
guarantee of future results. Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20
SUSTAINABLE FUNDS — ESTIMATED NET FLOWS
40
■ 2020 ■ 2019 ■ 2018 ■ 2017 ■ 2016
35
30
Estimated Net Flows ($, Billions)
25
20
15
10
5
0
Source: Morningstar. Chart shows estimated net flows -5
in sustainable funds by asset class, 2016–2020. Past -10
performance is not a guarantee of future results. U.S. Equity International Equity Sector Equity Taxable Bond Allocation
18BEGINNING OF A NEW CYCLE 2021 GLOBAL OUTLOOK
8 THE COVID-19 PANDEMIC CONTINUES
TO GRIP THE WORLD IN 2021
We are not out of the woods yet. The path to reopening and economic
growth is encouraging; however, we do not expect a straight line. The
vaccine rollout is still in early days and recent mutations of the virus pose
an ongoing risk. More importantly, public health impacts and virus spread
continue to be alarming, and the shape of a recovery and restoration of
public confidence and behavior is still unknown. We continue to believe,
as we presented in our March 2020 piece “The Epidemiology of Markets,”
that as COVID-19 is contained, the economy will ultimately reopen and
normalize. Markets have begun to discount much of that reopening ahead
of reality, which is a typical dynamic in markets.
THE UNRELENTING RISE IN COVID-19 CASES
350,000
300,000
250,000
200,000
150,000
100,000
50,000
Source: Centers for Disease Control and Prevention (CDC).
0 Chart shows daily trends in the number of COVID-19 cases
2/1/20 3/1/20 4/1/20 5/1/20 6/1/20 7/1/20 8/1/20 9/1/20 10/1/20 11/1/20 12/1/20 1/1/21 in the U.S. reported to the CDC since January 2020.
192021 GLOBAL OUTLOOK BEGINNING OF A NEW CYCLE
9 IT’S STILL NECESSARY
TO EXPECT THE UNEXPECTED
Don’t be complacent, volatility and uncertainty will continue in 2021.
The erratic “risk on/risk off” market of 2020 will likely continue in 2021.
U.S. domestic politics, pandemic public health issues and global
geopolitics will continue to surprise.
The CBOE Volatility Index, a historical measurement of expected market
turbulence, has fallen from its 2020 highs but remains elevated well above
long-term averages. It will likely come down further over time, but it will
not happen overnight. For myriad reasons, 2020 was a year unlike any in
recent memory. However, just because we turned the calendar to 2021
doesn’t mean all is well. For investors, a balanced and active approach
continues to make sense.
VOLATILITY WANES FROM 2020 HIGHS, BUT REMAINS ELEVATED
$70
— CBOE Volatility Index — 5-Year Average
$60
$50
$40
$30
$20
Source: Chicago Board Options Exchange (CBOE) Volatility
Index. Data shows the historical measurement of expected $10
market volatility based on the expected level of price
fluctuation in the S&P 500 Index options from 2016–2020. $0
The higher the value, the more the expected volatility. Past Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21
performance is not a guarantee of future results.
20BEGINNING OF A NEW CYCLE 2021 GLOBAL OUTLOOK
10 MARKETS ARE AT ALL-TIME HIGHS, AND WHILE
THERE IS FROTH, THERE IS ALSO OPPORTUNITY
Corporate earnings will
likely recover in 2021.
The outlook looks positive, but we advise investors to not buy blindly.
Higher returns in 2020 will reduce returns in 2021 and beyond, but
that doesn’t make the overall market a bubble. This is the time to be an
active investor.
On many valuation measures, stocks are expensive relative to history.
However, on cash flow measures, and relative to bonds, equities continue
to look reasonably valued. P/E ratios are inflated in part by depressed
earnings stemming from the 2020 downturn, while 2021 should see
accelerating corporate earnings growth as the economy reopens.
RECORD-SETTING PERFORMANCE FOR U.S. AND GLOBAL MARKETS
160
— S&P 500 Index — Russell 2000 Index
— Nikkei 225 Index — STOXX Europe 600
— MSCI EAFE Index — Hang Seng Source: FactSet. Chart shows performance from 2017–
140 2020 for the following: S&P 500 Index; Russell 2000
Index; Nikkei 225 Index, a stock market index for the
Tokyo Stock Exchange; and the Hang Seng Index, a float-
% total returns
120 adjusted, market-capitalization-weighted stock-market
index in Hong Kong. The MSCI EAFE Index is an equity index
that captures large- and mid-cap representation across
100 developed markets countries around the world, excluding
the U.S. and Canada. The STOXX Europe 600 Index is a
float-adjusted market capitalization weighted index that
80 measures the small-, medium-, and large-capitalization
companies of 17 European countries. It is not possible to
invest directly in an index. Total returns indexed to 100 to
60 show performance on the same scale. Past performance
Dec-17 Apr-18 Aug-18 Dec-18 Apr-19 Aug-19 Dec-19 Apr-20 Aug-20 Dec-20 is not a guarantee of future results.
Markets are reaching new highs, while earnings are in a slump. The
bottom-up consensus view is that earnings will fully recover in 2021
to surpass peak levels of 2019. Average P/E is on the high side, but, as
the saying goes, “If my feet are in the oven and my head in the freezer,
my temperature on average may be healthy.” Likewise, with equity
market valuations — where overall metrics bely a mix of highly valued
asset-light secular growth stocks, combined with laggard asset-intensive
cyclical businesses with currently depressed earnings — our point is not
to dismiss the importance of discipline regarding valuation, but to note
that statistics can be misleading when aggregated.
212021 GLOBAL OUTLOOK BEGINNING OF A NEW CYCLE
With the broad market trading at 22 times forward earnings, and cash
flow valuations still below long term averages, we do not see this as a
bubble. Having said that, we have seen specific parts of the market
ebullient with the enthusiasm and excesses of a bull market, as discussed
in areas such as cryptocurrencies, IPOs generally and SPACs specifically.
We think that this makes the case for active investing, and picking one’s
spots based on discipline and fundamentals.
As we have stated, while the strong market environment in 2020 will
result in somewhat lower returns going forward, given the increasingly
high quality, asset-light nature of public equity markets, and both
absolute and relative cash flow valuations below long term averages,
along with tailwinds from the current economic cycle, we believe that
equities are an attractive asset class for active management.
DEREK HAMILTON,
GLOBAL ECONOMIST
Derek Hamilton is responsible for U.S. and global economic research. Under his leadership,
the economics team brings important insights and thought leadership to the firm’s
investment professionals.
Mr. Hamilton joined the organization in 1996 as an economic analyst. He assumed
international analyst responsibilities in 2000, specializing in foreign currencies and
international economics. He was appointed assistant vice president and international
economist in 2007 and appointed vice president and global economist in 2010. He was
appointed senior vice president in 2015.
Mr. Hamilton graduated from Rockhurst College in 1996 with a BSBA in Finance/Economics.
He earned an MBA in Finance/Management from Rockhurst College in 1999.
Mr. Hamilton is a member of the CFA Institute, CFA Society Kansas City and the National
Association for Business Economics (NABE).
DANIEL P. HANSON, CFA
CHIEF INVESTMENT OFFICER
Dan Hanson joined the company in 2019 as senior vice president and CIO, bringing over
25 years of investment and leadership experience.
Mr. Hanson has served as an investment executive at BlackRock, Jarislowsky Fraser, and
JANA Partners. He brings significant experience in global and ESG investing through his
work at BlackRock, where he spent 10 years as a portfolio manager and as Managing
Director, Office of the CIO. He managed the BlackRock Socially Responsible Equity strategy
as well as co-led the Large Cap Series funds with $23 billion in assets under management
and maintained a leadership role in establishing the firm’s ESG initiatives. Subsequently,
he was Partner and Head of U.S. Equities, and Co-Chair of the Investment Strategy
Committee overseeing $30 billion in assets under management with Jarislowsky Fraser
Global Investment Management, where he established the New York office for the Montreal-
headquartered firm. Most recently, he served as Head of Impact Investing for JANA
Partners. Mr. Hanson has also been on the professional faculty at the University
of California-Berkeley Haas School of Business since 2016.
Mr. Hanson received his Bachelor’s Degree in Economics and French from Middlebury
College, and earned an MBA, Accounting and Analytic Finance, from The University of
Chicago. He is a CFA® charterholder.
22The opinions expressed in this article are those of Ivy Investment Management Company and are not meant to predict or project the future performance of any investment product. The opinions are
subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not
intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific
objectives, financial needs, risk tolerance and time horizon.
Risk factors: Investment return and principal value will fluctuate and it is possible to lose money by investing. International investing involves additional risks, including currency fluctuations, political or
economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Fixed income securities are subject
to interest rate risk and, as such, the value of such securities may fall as interest rates rise. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal
than higher-rated bonds.
The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and
capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare
systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak
and its effects cannot be determined with certainty.
IVY INVESTMENTS℠ refers to the investment management and investment advisory services offered by Ivy Investment Management Company, the financial services offered by Ivy Distributors, Inc., a FINRA
member broker dealer and the distributor of IVY FUNDS® mutual funds and IVY VARIABLE INSURANCE PORTFOLIOS®, and the financial services offered by their affiliates.
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