Will emerging markets and commodities be the top trades for 2021?

With just a few weeks left 2020, FundCalibre hosted an online event for investment journalists this week, tackling the subject of 2021 – and what the new year may hold for bonds and equities.

We invited Dickie Hodges, manager of Nomura Global Dynamic Bond, and Stuart Rhodes, manager of M&G Global Dividend, to give their views. Here’s what they had to say:

Dickie Hodges, manager of Nomura Global Dynamic Bond

“I believe 2021 will be a transition year. Even though markets are back to all-time highs in some cases, central bank quantitative easing will continue for the foreseeable future because economies will take time to recover – despite the positive news on vaccines it will take time to manufacture and distribute them.

“We are closer to (if not already at) the bottom of interest rate policy globally – with the exception of perhaps one or two emerging markets. But no country is in a position to raise them. So the cost of borrowing will not go higher. Fiscal support, which is already at record breaking amounts, will also continue.

“This means risk assets like corporate bonds, high yield bonds and subordinated debt will deliver good returns – not as big as the returns in 2020, but still good.

“As we get more positive news on vaccines, there will be less of an impact on markets as it’s not a surprise. The bigger impact will be if there are delays of any sort, at which time markets will react negatively. But I think those reactions will be short-lived and therefore a buying opportunity.

“I actually think all markets will be positive next year as everything will improve. Markets are driven by sentiment and many investors have been underinvested going into the end of 2020. As money goes back in, it will also boost assets. I think most equity markets could return 10% – even weaker markets like Latin America should deliver.

“Another driver will be when we see a broadscale return to dividend distributions – we’ll see a flow of money into equity markets at that point.

“So I’m positive risk assets for 2021 – the bigger issue will be 2022 when central banks make an abortive effort to withdraw QE.

“The one trade I’d pick for 2021 is emerging markets – both bonds and equities.”

Stuart Rhodes, manager of M&G Global Dividend

“While all the headlines about dividends have been negative this year, I’ve been surprised by the number of companies still paying them and, in some cases, growing them.

“Positive news on vaccines has also improved the outlook, with the events of the past few weeks starting to increase confidence that dividends and growth in 2021 will be more robust.

“The scale of the recovery should hopefully drive some impressive returns in certain parts of the market. We are also starting to see the emergence of a weaker US dollar, which has ramifications for many things, but especially the ‘grubbier’ end of the market, like oil companies.

“I don’t believe 2021 will be all one way traffic again – it won’t be just about growth companies and the big tech firms. This is nothing like the tech bubble of 1999, so I’m not pouring cold water on the big tech stocks, it’s just that I think the euphoria around them will wane.

“The one trade I’d pick for 2021 is commodities. They are becoming more affordable every day and the profitability of companies in this space will increase – energy and chemicals businesses, for example. These companies were also on very low valuations in the summer so there could be some big moves up.”