Ongoing policy support and the quickening pace of vaccine distribution have helped to create an aura of optimism. Beneath the surface, while confidence in an economic rebound is growing stronger, expectations for asset returns are rather more circumspect. Even those who are overwhelmingly positive on the economy accept that expressing such a view in portfolio positioning now requires a more clinical approach than merely buying stocks and selling bonds. 
We expect a prolonged period of above-trend global growth that will last through 2021 and well into next year. Initially, the US economy is likely to lead, given the scale of stimulus and relative success of the vaccine rollout. However, we expect other regions to catch up over the course of 2021. Regions such as Europe that are likely at peak pessimism now over vaccine delays seem poised to accelerate later in the year.
By contrast, the leadership by Asian economies that was especially strong in 2020 may moderate a little as global services start to catch up to the surge already underway in global goods markets.
Inflation remains a persistent concern for investors. We expect headline inflation to be volatile in the second and third quarters, with the potential for some sticker shock as annualised base effects generate optically elevated year-on-year readings. However, we believe that many of the secular disinflationary forces - globalisation, technology adoption, etc. - continue to anchor core inflation so that even allowing for huge policy stimulus, inflation rates should remain contained in 2021.
Policymakers have thus far telegraphed a sanguine view of inflation. We believe that even if core inflation moves reasonably above target, the Federal Reserve will be reluctant to signal policy tightening. At the end of 2021, the Fed may communicate a tapering of bond purchases that would gradually take place over 2022, but even should that occur, we do not see any change to fed funds rates until well into 2023 at the earliest. With other global central banks well behind the Fed, we see a prolonged period of easy financial conditions but steepening yield curves.
The economic and policy backdrop calls for a pro-risk tilt in our multi-asset portfolios. Nevertheless, we acknowledge that the early innings of this market cycle are over and the pace of returns will moderate from here.
Picking the best spots to deploy risk is today a more nuanced process. For instance, we want to continue to position for US economic strength, but we will need to rethink the way we express this view. Simply put, the sectors and style tilts that worked so well in the last cycle are unlikely to perform so well as rates rise and curves steepen.
In our multi-asset portfolios we are overweight equities and credit, and underweight duration and cash. The complexion of our equity overweight is shifting, and in 2021 we expect earnings growth to be the primary driver of returns while multiple expansion takes a back seat. As the economy gathers steam, we also expect operating leverage to be important. Sectors with positive gearing to higher rates - such as financials - have scope to rerate.
In equities, we lean into cyclical sectors and regions, and value styles, while reducing our exposure to long-duration equity sectors such as technology, and growth styles. Overall, this leaves us preferring U.S. small caps, Europe and Japan at the expense of emerging markets — which could be further constrained by strength in the dollar — and US large-caps. In some of our portfolios, we are further modifying our US exposure to favour an equally weighted S&P 500 in place of the traditional market cap-weighted index.
In fixed income, we see credit returns being primarily driven by carry and favour high yield over investment grade. In sovereign bonds, we are now modestly underweight duration, in particular in US Treasuries, since the Fed has shown little inclination to push back on rising yields.
Overall, our portfolios are geared to above-trend growth, higher yields and a cyclical earnings recovery.
Key risks are unjustified withdrawal of policy stimulus stopping the recovery in its tracks, unwarranted consumer caution as economies reopen, or vaccine nationalism deteriorating into wider trade disputes.
Nevertheless, our central case remains a strong recovery and an economy moving rapidly from early to mid-cycle, with asset markets continuing to offer decent upside, albeit demanding a more targeted approach than they did last year.
John Bilton is head of global multi-asset strategy at JP Morgan Asset Management. The views expressed above are his own and should not be taken as investment advice.