Capital market outlook 2021: counting on things to reopen

The coming winter will be challenging, but the economy should start to bounce back strongly in the spring of 2021. Add to that an expansionary fiscal policy environment and the central banks’ increased tolerance towards inflation, and economic growth should gather momentum. Against the backdrop of persistently negative real rates of return, equities are Union Investment’s favoured asset class.

Jens Wilhelm


Jens Wilhelm,

member of the Board of Managing Directors

According to Jens Wilhelm, the member of Union Investment’s Board of Managing Directors responsible for portfolio management and real-estate business, 2021 will be a year of opportunities in the capital markets. He believes that negative real rates of return, an environment of expansionary monetary and fiscal policy, and progress in the fight against the pandemic will shape the market outlook. “This winter will be a challenging six-month period, not least for the economy. But in the spring, we will see a significant upturn in growth,” he says confidently. Wilhelm therefore recommends opportunity-oriented investments.

At present, the global economy is still under significant pressure from coronavirus. Union Investment does not expect a vaccine to turn the tide in the fight against the pandemic until around mid-2021. A return to normality will be possible only once a large proportion of the population has been vaccinated. But Wilhelm does recognise that, compared with the spring of 2020, significant progress has been made in combating the disease. “We have learned a lot, both in medical and in economic terms. The fallout from the second lockdown will therefore be less severe.”

Economic growth to pick up from spring 2021

Over the six winter months of 2020/2021, the pandemic will continue to weigh on the economy. Following a weak start to the new year, economic growth should gather significant momentum over the further course of the year. More specifically, Union Investment expects US gross domestic product (GDP) to grow by 3.3 per cent. In terms of economic output, the US should be back at pre-crisis levels by the end of the year.

The eurozone will need a little longer. It will take until 2022 to regain the ground lost during the crisis. In 2021, however, economic growth in the eurozone should still be as high as 4.2 per cent. Germany’s GDP is predicted to grow by 3.3 per cent. The healthy economic recovery in Asia will support German exports. After all, China is the only major economy that is actually seeing a V-shaped recovery at present.

Wilhelm anticipates that a more proactive fiscal policy will provide support. He believes that the US will adopt a new comprehensive stimulus package in January 2021. Once the transition of power in the White House has finally been completed, Congress should be able to agree new support measures swiftly. Other economies are also likely to see increased levels of government spending. “Austerity will be replaced with an active fiscal policy approach – including in Germany,” says Wilhelm. With regard to the capital markets, he believes that this paradigm shift will be the most decisive waymarker of the current decade. Previously, monetary policy had been bearing the brunt of the burden when fighting crises. Now, fiscal policy is also weighing in. “COVID-19 means the end of austerity,” concludes Wilhelm.

Negative real rates of return

At the same time, monetary policy can be expected to remain expansionary. The ‘coordinate system’ of monetary policy is undergoing a recalibration, as evidenced by the US Federal Reserve. “The Fed has taken the lead and others will follow. They will give inflation targets a ‘memory’ and thus grow more tolerant towards temporary episodes of above-target inflation,” explains Wilhelm. This increased tolerance of inflation will enable central banks to focus more on growth, and monetary policy will remain very expansionary for a while longer. The European Central Bank (ECB) has not announced its new strategy yet, but it seems to be following the same line of thought Union Investment expects that the ECB will announce further monetary policy measures in December, including an expansion of its asset purchases and new tenders.

As a result, nominal interest rates should remain low for a long time. Even if inflation rises only slightly, the real rates of return – i.e. returns adjusted for inflation – on safe-haven assets will largely stay in negative territory. “Negative real rates of return will become the norm. Higher-yielding assets will become indispensable for any sensible investment strategy,” says Wilhelm.

Negative real interest rates are forcing investors to opt for higher-yielding assets

Negative real interest rates are forcing investors to opt for higher-yielding assets
Sources: Refinitiv, Union Investment; As at 17 November 2020. The figures for 2022 constitute rough estimates and are not a forecast by Union Investment.

Equities are the preferred asset class

Against this backdrop, equities are a particularly promising asset class. Corporate profits should start to boost share prices in 2021. Union Investment anticipates a rise in global corporate profits of up to 30 per cent year on year. At the same time, low – or even negative – real rates of return are keeping valuations at an elevated level. “For equities, this is almost the best of all worlds,” Wilhelm concludes. For the year as a whole, he believes that this asset class could deliver a return of as much as 10 per cent. He predicts that the DAX will stand at 14,000 points at the end of 2021.

Overall, regional trends and style preferences are likely to converge much more noticeably than in previous years. The economic recovery should benefit both cyclical sectors and value stocks over the course of the year. Careful security selection will be key as COVID-19 is accelerating trends and promoting a higher degree of differentiation among winners and losers.

In the real estate sector, Wilhelm sees a number of challenges arising from the pandemic. But all in all, he believes that this asset class, which is driven by intrinsic value and strong cash flows, still holds appeal in the current environment. Real estate will remain a key component of any balanced portfolio, especially in times of negative real rates of return.

On the fixed-income side, Wilhelm takes a cautious view of safe government bonds such as US Treasuries and German Bunds. “With low coupons and slightly rising yields, conditions will not be favourable for safe havens,” he predicts. He expects that the yield curve will steepen slightly due to an upward trend at the long-dated end and that yields on German and US government bonds will diverge. This means that the transatlantic spread is likely to widen. Opportunities in the bond market will be limited overall. Bonds that offer risk premiums will therefore remain attractive. “Corporate bonds, paper from the eurozone periphery and bonds from the emerging markets continue to offer opportunities,” Wilhelm concludes.

Periphery bonds supported by diminishing supply

Periphery bonds supported by diminishing supply
Sources: own calculations based on data from the national finance agencies of the individual member states, European Union, AMECO database, Bloomberg, as at 17 November 2020.

As at 17 November 2020.