The fiscal and monetary policy conditions that have fuelled the rally across most asset classes since the coronavirus sell-off in March are also likely to buoy returns in 2021, according to Nomura Asset Management’s Dickie Hodges, although they may be more subdued. 
FE fundinfo Alpha Manager Hodges (pictured), who oversees the $2.8bn Nomura Global Dynamic Bond fund, said there are several reasons that risk assets make positive returns next year.
He said: “All markets will deliver positive returns next year because there’s going to be this backdrop that things are going to improve.
“There’s going to be no stepping back from the fiscal responsibility that all governments have to bear now and the responsibility of all central banks to be supportive in light of a transition year.”
Hodges continued: “We’ve seen, generically, what drives markets in this environment is when you’ve got zero cost of financing and you’ve got zero interest rate policy.”
Indeed, the Alpha Manager said central banks will continue to stand firm with the levels of monetary support – in the form of ultra-low interest rates and quantitative easing – that has been witnessed during the Covid-19 pandemic.
This is a key difference to 2018, said the Nomura Global Dynamic Bond manager, when the Federal Reserve hiked rates, which caused double-digit losses for equity markets and high single-digit losses for debt capital markets.
Performance of global equities in 2018
Source: FE Analytics
And there is unlikely to be a big withdrawal of stimulus given what happened the last time it was withdrawn too early.
“The last time, you recall, was 2013. When that happened when the Federal Reserve tried to withdraw, what we know as a ‘taper tantrum’ occurred,” he continued. “So, reasonably, that’s not going to happen in 2021.”
Furthermore, fiscal support remains strong with governments continuing to support economies stricken by the coronavirus.
“We know that in the US, they’re still debating the size of the next fiscal support package, whether it be $1trn, $2trn, or even $3trn,” he said. “This is record-breaking amounts of stimulus.
“And we’re having this in the UK, we’re having this in Europe. In fact, we’re having this globally.”
As such, the fund manager said the conditions during 2021 are likely to continue to remain positive for risk assets, particularly as there are still huge sums uninvested since the sell-off earlier this year.
“The fact of the matter is, there is far too much money uninvested in all asset classes,” he said, noting that many investors have been very slow to put money back to work after the collapse of equity markets earlier this year.
“What we have seen more recently, the strong performance of all risk assets… is driven by fund flows, is driven by money flowing into equity ETFs [exchange-traded funds].”
Hodges continued: “A lot of these markets are driven on optimism, driven on the sheer weight of cash and under-invested cash, which is now being utilised going into the year [ahead].
“And you would think that when that cash flow starts slowing up, we shouldn’t expect markets to reasonably give the same returns we seen in the month of November.”
Hodges warned investors not to expect the type of returns seen during November – as positive reports on the efficacy of several vaccines broke – to be repeated in the successive months.
“Please don’t think that after we’ve had a 4-5 per cent positive returns in one single month that you’re going to have that repeated the following month,” he said. “That is what is known as serial correlation and is a very dangerous thing to follow.
“There will be opportunities on any weakness, whether it be Japan’s Nikkei or any market, and I would suggest that you and I should be investing any uninvested cash into these capital markets because they’re going to be supported.”
On the fixed income side, Hodges said corporate debt will also deliver positive returns, although – like equities – they may be more subdued than in 2020 and it will still be difficult to achieve reasonable levels of income, as it had been before this year.
“It’s very difficult to achieve a level of income to meet reasonable expectations of all investors unless you go further down the capital structure to take a further level of risk,” said Hodges.
“Principally, the world of fixed income generates positive returns when interest rates are cut and when inflation is falling. End of story.
“It always has been the case and rather fortunate for fixed income fund managers that that’s exactly the environment we’ve had – the perfect environment for fixed income – for the last 30 years.”
And while that environment might not change soon, he said, it is difficult for interest rates to fall further while inflation might rise.
Hodges concluded: “I still am firmly in the camp of being positive for risk assets through much of 2021. The big issue we’re going to have in 2022 or maybe later in 2021, is when central banks make an abortive effort to withdraw some of the quantitative easing support.
“And that will be a big mistake and reflected in asset prices.”
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
Hodges has overseen the four FE fundinfo Crown-rated Nomura Global Dynamic Bond fund since launch in 2015. During this time, it has made a total return of 35.52 per cent compared with the average IA Sterling Strategic Bond peer’s gain of 25.27 per cent. It has an ongoing charges figure (OCF) of 0.71 per cent.