Real Vision: The Golden Age of Asset Allocation
Real Vision: The Golden Age of Asset Allocation

Jay Pelosky joins Real Vision managing editor Ed Harrison to discuss his macro outlook for 2021. Pelosky shares the areas of opportunity that are on his radar, including high-yield bonds, and equities in Europe and China. Harrison asks Pelosky to update his positive thesis on small-caps equities and emerging market stocks, which have been on a tremendous tear for almost two month. Pelosky explains why despite their frenetic upsurge, he remains bullish on these asset classes as well as other assets that benefit from an increase in growth and inflation. Lastly, Pelosky tells Harrison why the reflation that he expects to see in 2021 will be a drag on sovereign bonds, particularly U.S. Treasurys. Filmed on December 15, 2020. Key learnings: The rotation from growth stocks into value equities is just getting started. Reflation and re-opening will further boost stocks, specifically small-cap and emerging market equities.

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As The Tri Polar World Turns: 2021 Outlook - A Golden Age for Asset Allocation

Executive Summary

Don't be misled by November's stock market surge - over the past three months ACWI is up 5%, led by ACWX up 9%; the US trails badly with S&P up less than 3%. Covid 19 vaccines worth much more than that as we will see in 2021.

Best get used to that US underperformance. As noted on BTV November’s advance represents the first innings of a multi year equity bull market underpinned by a synchronized global economic BOOM, the likes of which haven't been seen in roughly 50 years.

Vaccines, record global liquidity, the melding of fiscal and monetary policy & the rebirth of the global consumer fueled by a mountain of excess savings reinforce the global boom.

Expect a “golden age” of global asset allocation as the Great Rotation unfolds across assets, regions, countries, sectors, factors & styles.

Overbought conditions and euphoric sentiment suggest a healthy pullback ahead which should be used to ensure proper positioning. Risks include: fiscal fatigue, political miscalculations & miscues in the vaccine rollout. Absent vaccine related fatalities pullbacks should be bought.

HEALTH

Speed is Covid 19’s signature. Vaccines in less than a year vs the normal decade long process reflects the speed of science. Speed of delivery comes next & will leverage the global logistics system. Expect mass vaccine acceptance as 1st responders are successfully inoculated. It is often darkest before the dawn - that's true today with Covid. Next 3-6 months will look very different.

ECONOMICS

Global growth is likely to be 6%+ next year (MS expects 6.4%). 2022 will also be very robust as Central Banks let inflation run hot via AIT. Excess savings = to 7-10% Global GDP support consumption; vaccines stimulate the service sector to catch up to manufacturing. Both China and the US will support their working classes. Inflation will surprise to the upside.

POLITICS

Pres. Elect Biden’s DC knowledge, the situation he inherits + the economics team he has assembled suggests a much more aggressive and progessive Admin than many expect - even with a split Govt (TBD). Partisan gridlock, appealing to some, simply leaves the US/Americas further and further behind in a rapidly integrating Tri Polar World led by Asia and Europe. Expect the EU's Next Generation plan to be put in place coupled with a deal on Brexit. Europe has a chance to win the 2020s, execution will be key.

POLICY

Health policy leads, fiscal policy follows, monetary policy in 3rd place. It's a new world. Biden likely to go big on fiscal stimulus around infrastructure & climate with focus on full employment - makes both economic and political sense. EU Green Deal/JRF likewise ties fiscal and climate together - joint issuance > joint taxation > EU safe asset. Common deposit insurance next followed by banking union & cross border M&A. RCEP boosts Japan, reinforces Asian supply chains, puts China in Asian integration driver’s seat.

MARKETS

Death of global macro? Hell no. Golden opportunity for asset allocation/thematic to add alpha. Global economic boom suggests Equities and Commodities have best upside while long bonds end a 40 year bull run and enter a bear market. Look for 10 yr UST to yield between 1.5-2.0% in 12M > Tech “kryptonite”. Great Rotation is more than just a trade: favor non US equity, Europe-Japan, Cyclicals/Value, Small Caps, Asia and Lat Am in EM. Valuation fears overdone with EPS growth of 25% +. Tech tainted ESG at risk. Fixed Income focus: Credit (HY), Prefs, EM $ debt & Commercial Real Estate. Death of the office dead wrong. Industrial metals, energy (clean and old), precious metals too. Dollar down, regional FX blocs: Asia & RMB, EU & Euro, Americas & USD starting to form.

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