World on the Mend

Markets are entering the new year optimistic about the successful development of vaccines to combat the spread of COVID?19, seeing the news as a light at the end of the dark tunnel that was 2020. The extreme enthusiasm, however, has driven many markets to record highs, extending valuations and creating a rotation toward cheaper stocks in more cyclically exposed parts of the economy. In contrast with last year, 2021 is likely to be a year of reversion rather than momentum, reinforcing the benefits of broader diversification.  

Reopening to Unleash Pent?Up Global Demand 

While there is reason to be optimistic about the effectiveness of the vaccines as a catalyst for recovery in 2021, global economies still face unprecedented logistical challenges in deploying the vaccines. At the same time, fears about another wave of the coronavirus are again forcing many countries to enforce lockdowns. The path to successful global immunization by the spring could be winding and uneven as different parts of the world deal with the current crisis while potentially exhausting their stimulus measures, leaving extended markets vulnerable to near?term volatility. Although the path may be choppy, we expect the recovery to take hold once broad immunization occurs, allowing economies to safely reopen and unleashing pent?up global demand.  

The improving economic backdrop, supported by monetary policies set to remain ultra?accommodative, will create opportunities and risks as markets rotate toward the “COVID?off recovery.” The environment should be supportive for risk assets, including stocks and corporate bonds, as growth and earnings outlooks improve, potentially leading to a broadening of performance across asset classes and sectors. More cyclically exposed economies and sectors may outperform, although investors will be cautious in avoiding segments of the markets that may be impaired by post?pandemic trends, warranting the need to be selective. 

Improving growth trends, however, may put upward pressure on longer?term interest rates, leaving nominal U.S. Treasuries and other high?quality global sovereign bonds as unattractive diversifiers. Investors will likely trend toward higher?yielding sectors, inflation?linked securities, and other investments with less interest rate sensitivity. Although the new year is beginning with little perceived upside to extended valuations, attractive opportunities persist across markets—notably those that have been on the losing side of decades?long trends.  

Click here to review the full article where my colleagues and I offer various multi-asset perspectives, regional perspectives, research, and tactical views on the year ahead. 

Additional Disclosures 

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Important Information 

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action. 

The views contained herein are those of the authors as of December 2020 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates. 

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Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy. Actual future outcomes may differ materially from any estimates and forward-looking statements made. 

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. These risks are generally greater for investments in emerging markets. Fixed?income securities are subject to credit risk, liquidity risk, call risk, and interest?rate risk. As interest rates rise, bond prices generally fall. Investments in high?yield bonds involve greater risk of price volatility, illiquidity, and default than higher?rated debt securities. Investments in bank loans (floating rate loans), may at times become difficult to value and highly illiquid; they are subject to credit risk such as nonpayment of principal or interest, and risks of bankruptcy and insolvency. The value approach to investing carries the risk that the market will not recognize a security’s intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced. Growth stocks are subject to the volatility inherent in common stock investing, and their share price may fluctuate more than that of a income?oriented stocks. All charts and tables are shown for illustrative purposes only. 

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