2021 Financial Market Outlook: Virus or vaccine victorious?

Highlights

The ebb and flow of COVID-19 infections around the world and developments on the vaccine front are likely to be hugely influential in determining the outlook for the economy and financial markets in 2021.
A flare-up in COVID-19 cases during the Northern Hemisphere winter is likely to cause some near-term pressure on global economic growth associated with renewed lockdown measures, but should fade during 2021 as progress is made with the approval, mass production, global distribution and widespread administering of virus vaccines.
Although the balance of probabilities is in favour of a positive vaccine outcome and hence a conducive environment for riskier asset classes like equities in 2021, we acknowledge that there could be sporadic downside risks for these assets during the year in case of disappointments on the vaccine implementation front.
Riskier asset classes should benefit from a split US Congress and more geopolitical predictability as the former should imply a lower likelihood for increased regulation and taxes, while the latter should intimate less volatility in markets.
In general, an improved global growth picture, together with still ultra-easy policy settings, should reward less risk-averse investment behaviour in 2021. In such a risk-on environment, investors should be positioned for a weaker US dollar, a drift higher in US bond yields, expect general support for more risky asset classes such as equities and credit and be prepared for some equity style rotation from growth to value and regionally should favour non-US equity markets (including EMs) over the more defensive US equity market.
In contrast, safe-haven asset classes like global bonds, cash and gold are likely to face headwinds in a cyclical recovery phase, with bonds facing the additional challenge of somewhat higher inflation.
Valuations look expensive in most global asset classes, with low yields implying lower-than-historic forward returns across-the-board if there is some reversion towards longer-term valuation means.
It looks like the stars are finally aligning for the SA equity market, with a strong expected profit recovery in 2021 providing fundamental support on top of an envisaged conducive global risk-on environment, while a more favourable valuation underpin after years of poor performance should enhance potential return upside.
The almost zero real return available to investors from local cash looks unappealing, in contrast to the high real yields offered by SA inflation-linked bonds (ILBs) and vanilla bonds. The expected rise in SA inflation as 2021 progresses should provide a positive fundamental underpin for ILBs.
Although listed property fundamentals have weakened considerably in recent years, this is already discounted by share prices. To bolster weak balance sheets, some property companies will be forced to do capital raises.
The current level of US real interest rates gives a neutral tactical signal for gold exposure. However, we maintain that there is always a strategic rationale for gold as a portfolio risk diversifier.