By David Bianco, Chief Investment Officer Americas – DWS

As we shape our equity market expectations for 2021 we assume continued economic recovery supported by fiscal and monetary policy. More critical, we base our forecasts on the arrival of an efficient Covid vaccination that allows “normal life” by the end of 2021. We forecast 25-30% EPS recovery for most markets and “lower for longer” interest rates (US 10y 1.0% by 2021 yearend). As such, the constellation of TINA, FOMO and rebounding economic activity should support further market upside for equities.

Global trade prospects should benefit from the new political set-up in Washington. However, we expect ex-US markets to continue trading at elevated valuation discounts to the US, mainly due to the lower relative weight of high-growth stocks. Nevertheless, we have mid-single digit total return expectations for European and Japanese equities for 2021.

We predict double-digit returns for Emerging Market equities and upgrade both Asia ex Japan and emerging markets to overweight. Asia is our preferred region for 2021. China has successfully handled the Covid challenges without amassing significant fiscal debt which bodes well for long-term growth prospects. It is now the second time (first time was Global Financial Crisis) that China leads the world economy out of the slump, evidenced by rebounding European and Japanese exports to China. As such, the geopolitical rise of China should become even more visible during the coming years. China remains on track to add technological leadership to its military and economic superpower position. We expect EPS levels for the MSCI AC Asia ex Japan to surpass pre-Covid levels already in 2021, clearly ahead of the US and Europe.

We keep a modest preference for the growth camp for now
We believe making money by switching investment styles will be difficult in 2021. We expect several short-lived “cyclical“ and “value“ rallies as some allocators exit the herd of “growth” investors and will try out something “new“. However, interest rates and economic growth prospects are likely to stay too low to make these rallies sustainable and we keep a modest preference for the growth camp for the time being. Most value stocks are biased towards physical and financial assets on their balance sheet. Growth stocks, on the other hand, remain beneficiaries of the global spreading of digital technologies that are based on intangible assets. These offer strong network effects as well as superior and growing free cash-flow streams to shareholders. Therefore, we are sticking to our Information Technology overweight. Work from home and the rising share of ecommerce in retail spending make us stay on the sidelines in the real estate sector which we recommend to underweight.

It appears that 2021 will see several New “Green Deal” initiatives across the globe that should create thematic investment opportunities in climate technology across many sectors. We have therefore decided to upgrade utilities from underweight to neutral and would focus on renewable energy exposure within the sector. Our ESG-team feels it may be important to keep avoiding sectors with high environmental externalities, like oil, materials and airlines.

Beware false confidence, many uncertainties remain, boost diversification
U.S. and European economies should improve as the pandemic fades and services recover. But the now rampant contagion requires extensive vaccination for a full recovery. This winter will weigh on the recovery, but it’s within reach for late 2021. Recovery suggests that long-term interest rates climb, at least modestly, and S&P earnings per share (EPS) should return to its prior peak probably in 2Q21. A reasonable and constructive outlook, but it provides little help in forecasting equity returns for 2021. Fair or sustainable price earnings ratios (PEs) on mid-cycle earnings remains uncertain. This is the key uncertainty w e cited last year and it persists.

Let the new cycle reveal itself, new policies and macro trends still unknown…
The inflation debate rages and normalized real interest rates remain a mystery. How long this new cycle lasts and what real growth and holistic prosperity it delivers is just a guess at this early point. Clarity hasn’t emerged yet on new domestic or foreign policies from a Biden administration. Regulatory changes will come. U.S. fiscal (spend) and monetary policy remains uncertain. Thus, it’s an unsure outlook for basic macroeconomic variables, such as trend inflation, real gross domestic product (GDP) growth, interest rates, foreign exchange (FX) rates, and commodity prices. All key variables for Value stocks.

…yet many powerful secular trends have legs: digitalization, aging, conservation
Many important super-cycle or secular trends maintain strong momentum that can guide long-term investors. Such trends include more digitalization of the economy, including shifts from physical business locations and in person connectivity to virtual, automation and machine performed services. Aging and science will push economies further toward healthcare. Clean energy and conservation is the will of prosperous people. These trends support Growth stocks.