Lombard Odier: 10 investment ideas for 2021

It’s outlook time: asset manager are presenting their investment outlooks for 2021. Lombard Odier’s Chief Investment Officer Stéphane Monier (photo) makes it concrete by listing the institution’s 10 most important investment convictions and ideas for next year. Emerging markets get an important place, but hedging risks remains important too.

1. Stay invested in risky assets

‘It is important to keep in mind that long-term investors are rewarded by receiving risk premiums for holding assets. The positive vaccine news, which has made the road to a recovery clearer, is favourable. And so is the continuing monetary and fiscal support. As interest rates will remain low, we expect equity markets to rise further.’

2. Keep your allocation to safe assets intact

‘The economic recovery will not happen without turbulence and certain factors, such as the uncertain US budget, could throw a spanner in the works. We would therefore hold the portfolio a variety of hedges, such as US Treasuries, Chinese government securities, gold, the Japanese yen and put options on major stock market indices to protect the portfolio against the unexpected. These will have to be managed tactically’.

3. Keep a position in gold for now

‘Low interest rates have fundamentally increased the attractiveness of gold as a safe haven compared to government bonds. As the expected returns on government bonds are limited, gold has become a necessary allocation in a diversified portfolio, whereas it used to be optional. Short-term uncertainties will keep the price of gold between USD 1800 and 1950 per ounce. In the autumn of 2021, if the economic recovery continues and interest rates return to normal levels, we expect gold to fall to USD 1600, our 12-month target.

4. Use carry strategies to generate returns

‘Given the low inflation environment, fixed monetary policy and 10-year US Treasury yields below 1%, emerging market bonds denominated in hard currency (with yields fluctuating between 3-4.5%) look attractive. Both EM government bonds and corporate bonds will continue to be popular with investors looking for yield.

5. Buy value stocks

‘Taking into account the vaccine news, which we call a game changer, cyclical stocks, small caps and European industrial companies look more attractive. The difference in valuation between value and growth has never been as large as now, so we hardly see any downside risk for value stocks. We expect the industrial, construction, materials, finance and energy sectors to play catch-up. These market segments usually do well at the start of an economic recovery. The demand for quality names in healthcare and technology will continue unabated in 2021 as their foundations remain strong.’

6. Don’t miss Asian equities

‘The strong Chinese economy, driven by growing internal dynamics, ensures that Chinese equity markets are not correlated with the rest of the world. This is a major advantage for the diversification of an investment portfolio. Despite the size of the country, Chinese equities represent only 5% of the MSCI All Countries World index, while US equities account for 58%. It’s important to note that the Chinese economy already accounts for 16% of world GDP. This underweighting will fade, especially as MSCI increases the weight of Chinese A shares in its indices. We expect this trend to continue. In addition, the country has sky-high ambitions: China wants to double the size of its economy by 2035. And once Joe Biden is at the helm in the US, the country could benefit enormously from a thaw in trade relations.’

7. Invest in the real economy

By the real economy we mean three asset classes: real estate, private equity and infrastructure. In real estate markets, we are seeing enormous changes as the way we work has changed. There is clearly a lower demand for commercial real estate, and we will continue to see that pan out in the coming years. The demand for logistics facilities, on the other hand, will continue to increase. As far as private equity is concerned, it is important to bear in mind that unlisted companies are an important part of our economy and by investing in them, one can make a portfolio more robust.

8. Don’t take dollar risk

‘Despite the fact that the US dollar has already fallen by 12% since March 2020, it is still overvalued. We believe that under President Biden there will be a return to normality and this, combined with the vaccine news and an economic revival, will ensure continued dollar weakness in 2021 against the euro, sterling and the Japanese yen.’

9. Buy EM currencies

‘As we expect growth to recover in emerging markets and as risk aversion among (large) investors is declining, we expect most EM currencies to recover. Our preference is for currencies that are undervalued and have sufficient recovery potential, that are linked to China and are exposed to world trade, as well as currencies of countries that have been able to keep the pandemic under control and have strong finances. These include the Chinese yuan and the Korean won.’

10. Accept sustainability will be an important driver of returns

‘This theme is quite general and will persist for longer than in 2021. Companies with sustainable solutions in all industries and sectors will drive the transition to cleaner, more inclusive and circular alternatives. Our preference is for companies that develop new technologies and products that reduce emissions and slow down climate change.’