As an eventful and unprecedented 2020 draws to a close, investors will be casting their eyes to what the year ahead may hold. 
With this in mind, analysts at bank Goldman Sachs have highlighted 10 market and macroeconomic themes they believe will dominate 2021.
Below, Trustnet looks at the 10 themes in greater detail.
Vaccine-led recovery to lift cyclical assets
The first theme highlighted by the bank’s analysts is the expectation that the global economic recovery will broaden and deepen next year, providing a safe and effective vaccine becomes available.
“The economic and market outlook largely depends on the prospects for controlling the virus, and therefore the timeline for restoring activity in high-contact service-providing industries,” they said. “Through a public vaccination campaign – and with the help of friendly monetary and fiscal policy – it should be possible to recover a large portion of lost output over the next year.”
A broader and deeper global economic expansion should favour risk assets in general, the analysts noted, and the most growth-sensitive assets in particular, including commodities, cyclical equity sectors and emerging markets.
Cyclical assets would also benefit from a friendly policy mix, even without huge amounts of fiscal easing in the US, with central banks likely to keep interest rates at all-time lows and support markets with quantitative easing.
Navigating the path
While the market reaction to the news of the Pfizer vaccine is not surprising, said the Goldman analysts, the more credit markets take upfront for the outcome and the more growth upside they price in, “the worse is the asymmetry further out into 2021”.
“So, while we are confident about the destination – significant further upside in cyclical assets – the path is complicated by the deceleration in our growth forecasts in the current quarter and the market pricing of a more upbeat forward outlook,” they said.
A steeper real yield curve
While bond yields collapsed at the onset of the coronavirus recession as central banks cut rates and launched new QE (quantitative easing) programmes, this could start to change in 2021, said the Goldman analysts, as expectations of growth and inflation drive long-end rates higher.
“We encounter frequent concern that higher nominal and real rates could pose a problem for risky assets,” the analysts noted. “Although a much sharper move than we anticipate could be disruptive for equities and credit, we think these fears are generally overstated.”
Europe: Two steps forward, one step back
Despite having initially appeared to be “weathering the Covid crisis better than feared”, Europe has struggled as second waves of the coronavirus have hit, according to the bank.
However, beyond winter lockdowns, the outlook for a European economic and asset market recovery looks more promising.
“Compared with this time last year, Europe is much better prepared for a pullback in activity, so lockdowns should not spiral into something much worse,” the analysts said. “Policy actions during the acute phase of the Covid crisis have stabilised European sovereign bond markets and thereby reduced tail risks for other European assets.”
China: Forging ahead, with assets in tow
While the Chinese economy had spent “several years negotiating a bumpy slowdown”, its early recovery from the Covid-19 pandemic has meant GDP is already above pre-pandemic levels, the analysts said. And outperformance is likely to continue next year despite some tapering in credit growth and policy support, according to the bank.
“But the risk is, of course, that without more significant appreciation, trade tensions and tensions between China and other parts of the world still reeling from the aftershocks of Covid-19 may re-emerge in different forms, creating headwinds for Chinese assets in the medium term,” they added.
A new commodity bull cycle
Stronger economic growth in 2021 could fuel a new commodity bull cycle as years of structural underinvestment in commodity-producing sectors having created a deficit, the analysts noted.
“Given that inventories are drawing this early in the cycle, we see a new bull cycle for commodities emerging in 2021 as demand recoveries meet restrained supply,” they said. “Because inventories of oil remain high, upside in energy prices will likely come after winter.
“However, non-energy commodities, including metals, face immediate upside as balances have tightened ahead of expectations, driven by large Chinese demand and adverse weather shocks.”
Emerging market outperformance
While emerging markets have been hit hard by the pandemic and will likely continue to suffer for several years, the Goldman Sachs analysts said, there has been some “remarkable” resilience across emerging market assets.
“Across global markets, emerging market assets embed most tangibly a combination of cyclicality, commodity exposure, China sensitivity and pockets of deep value, all of which could be in favour through the course of the year,” they said.
“If this heady cocktail comes together all at once – something that hasn’t really occurred since the 2000s – emerging market outperformance may finally move beyond occasional short-lived bursts and become something more sustained through the year.”
Rotations: Cyclical, north Asia in focus but vaccine news key to near term
Furthermore, the bank believes that there will be further rotations in markets, with cyclicals likely to outpace growth in the near term and growing appeal for some non-US markets with lower Covid risks – particularly in north Asian markets such as Japan, China and Korea.
“The equity market’s favourite focus – on the split between ‘growth’ and ‘value’ and its various proxies – is more complicated on a macro basis, partly because both categories are more mixed in terms of their macro exposures,” they said. “Valuation measures between the two groups are clearly historically stretched and the macro shifts from the vaccine also generally favour more traditional cyclicals than long-duration tech stocks.
“To shift investors away from growth stocks in a persistent way, a sustained move higher in real rates and an end to the current dynamic where cyclical optimism translates into lower real rates may be needed.”
In search of new (and old) safe havens, hedges and diversifiers
“Hedging and diversification remain major challenges for many investors,” the analysts noted, adding that traditional safe-haven government bonds might not be able to deliver the uncorrelated returns of previous crises.
As such, investors may look to other assets such as currencies or equity derivatives, and exposure to non-US markets.
“Although we think that equities offer better upside in our central forecast than credit, assets such as cash credit and mortgage-backed securities in the US and corporate credit in Europe—which have direct central bank support—do have greater downside protection in an environment where hedging is difficult,” they said.
Risks from corona and beyond
Finally, the Goldman analysts noted that the biggest threat to asset markets and their own forecast of economic growth comes from health outcomes.
“A sharper deterioration than we expect in virus case growth in Europe and the US – and the prospect of a long period of new restrictions on activity – could clearly weigh on markets in the winter months,” they said. “And disappointing – or delayed – outcomes from phase-three trial results from the leading vaccine candidates would make it harder for the market to look through that weakness.”
They said several other key risks could be amplified in this scenario, including the impact of the crisis on corporate sector balance sheets.
So far this has been “surprisingly benign, helped by the aggressive policy response”, but the risk of persistent “scarring” from corporate bankruptcies and defaults could rise if an extended second wave or persistent lockdowns occurred, they noted.
“In Europe, renewed growth weakness could also reopen the thorny issues of fiscal capacity in the weaker economies and put fresh focus on sovereign backstops,” they added, which could be an issue for emerging markets as well.
And a stronger recovery next year could also bring its own risks, the bank’s analysts said.
More powerful growth and further gains in equity markets over the next year could bring ‘releveraging’ risk more firmly into focus, they noted, while asset valuations could start to become an issue.
“While we are not in the camp that sees equity market valuations as broadly stretched, given the current ultra-low real yield environment, valuations in large parts of equity and credit markets do not build in a large cushion against disappointments in growth or a sharper shift in real yields than we expect,” they said.