How I'm positioning my portfolio for the year ahead

The pandemic has had a substantial impact on companies and societies across the world, and brought with it unprecedented changes from healthcare to technology to economic policies. As a result, when look at portfolios and various asset classes, we need not only look at the short-term impacts of Covid-19, but also the changes and accelerations of various trends it has brought with it.

Here are my high-level views across global asset classes for 2021:

Equities - Overweight. Preference for US, EM and Asia

United States

Bullish on US equities given exposure to quality large cap names across sectors and benefitting from structural growth trends in tech and healthcare. Small caps should also see perform well amidst domestic recovery accelerating.

Europe

Europe may well do well given high exposure to cyclical sectors that should see a strong recovery in 2021, but the high exposure to financials makes the overall region less appealing given the pressure of low rates.

Emerging Markets

Emerging markets may well be the principal beneficaries of a vaccine-led recovery in 2021. The region should also be set to benefit from the weaker dollar and reduced tensions with the US under a Biden's leadership.

Asia ex-Japan

I see Asian markets performing well this year given that they already have the virus under control and are further ahead in the economic restart. The technological focus of their stock markets means they are well set to benefit from the sector's structural growth trends.

Value vs Growth

Value has outperformed when coming out of a recession, averaging 46% in the 24 months following the bear markets that have occurred since 1982. Cyclical value stocks that have been most depressed should outperform in the first half of this year and have far easier expectations to meet from investors. The long-term growth prospects however for many sectors such as technology and healthcare mean these should remain a key part of equity portfolios.

Sector Preferences

Further to the above, it is important to have a barbell strategy to balance the cyclical sectors as the economy recovers with those sectors with structural growth. Overall I would keep with tech given its high growth potential and ability to benefit from a low-rate environment. Healthcare has been boosted by the election result and a low chance of sweeping policy changes in a divided congress, whilst also being relatively attractively valued and containing a lot of quality stocks. Meanwhile, within value and cyclicals, financials should be poised to do well as the yield curve starts to steepen and the economy recovers, whilst there are also set to be opportunities within energy helped by demand returning impacting sectors from travel across to manufacturing.

Bonds - Preference for credit vs government bonds

Government bonds

With rates so low, the ability for bonds to act as a form of protection in equity market selloffs has been greatly reduced, although there should still be an allocation within portfolios.

Within government bonds, I have a preference for peripheral Europe where there will likely be a further compression of rates as the ECB steps up its QE program and other potential policy actions. In the US meanwhile, real yields are likely to decline given increased expectations around medium-term inflation.

Credit

In the low-rate environment we are in, there is still certainly a place for credit's income in portfolios, with a preference for the yields on offer within high-yield credit. The ongoing economic recovery should place credit in good stead even in the face of any wind-down in emergency credit support. EM credit should also do well given more stable US-relations, a weaker dollar and easy global monetary policies

Cash

With few economies yet out of the woods and markets still experiencing overall heightened volatility, holding some cash does make sense in the event of a potential supply shock that could drive both equities and fixed income lower, as well as to have some dry powder on hand to take advantage of equity and credit pullbacks.