3 Investment Asset Classes Positioned for Growth in 2021Submitted by Reby Advisors | Certified Financial Planners | Danbury, CT on December 17th, 2020
By Devone McLeod, CFP®, December 18, 2020
Did you know that stock market investors would have earned 50% lower returns over a 25-year period simply by missing out on the 10 best days during that timeframe?
Keeping money on the sidelines, in cash and away from market volatility, may feel very safe during a recession—especially in light of the four risks that I outlined last week. However, cash carries a lot of opportunity risk, the possibility that you could get higher returns by investing elsewhere.
So, which investment asset classes are most likely to produce desirable returns over the next few years?
An accelerating global economic recovery and potential currency fluctuation could be a boon to certain industries, regions, and fixed income instruments. These catalysts could tilt the scales in favor of asset classes that have underperformed in recent years.
Here are three asset classes that are now well positioned for growth, according the Global Market Strategist Brian Levitt:
1. Value Stocks
Value stocks haven’t gotten much love since The Great Recession, earning 39% less in total returns than growth stocks from June 2009 through February 2020.1 Value investing simply did not align well with economic conditions during the mostly slow-but-steady 128-month expansion.
Levitt and many other analysts believe that is about to change.
Value investors buy stock in fundamentally strong businesses when share prices become depressed due to temporary conditions—recessions, supply chain disruptions, etc. The disruptive event eventually passes, and economic activity accelerates. Savvy long-term value investors then reap the benefits when share prices appreciate, and companies increase dividend payments.
Does the current situation fit the value investing formula better than the modest, consistent growth that defined the pre-pandemic business cycle? The right elements seem to be in place.
The pandemic, of course, is the disruption to business. The new vaccines could (fingers crossed) resolve the underlying cause of the recession. And a global reopening could give us the accelerating economic environment we haven’t seen in more than a decade.
2. Emerging Market Equities
The World Economic Outlook (October 2020), by J.P. Morgan Asset Management, projects China to become the world’s largest economy by 2025. India and Indonesia will enter the top ten.2
Economic growth in these nations is nothing new. So, why did the MSCI Emerging Markets Index underperform the S&P 500 by nearly 10% on an average annual basis from 2010 through 2019?3
Levitt attributes the disappointing returns to a strengthening U.S. dollar. Depreciation of a foreign currency, relative to the dollar, erodes the returns on investment assets that trade in that currency.
On the flipside, a weakening dollar can make international investments more profitable. Many economists expect the recent decline of the U.S. dollar to continue through 2021 due to the Federal Reserve’s commitment to keep interest rates low and the money supply loose.4
Favorable currency fluctuation may be exactly what the emerging market equities asset class needs to fulfill its vast potential.
3. High Yield Bonds
In Spring 2020, at the crossroads between the stock market crash and the emergence of the pandemic into the U.S., high yield bonds began their massive sell off. This was mainly because investors feared defaults.5
However, bonds have been recovering since then. The good news is, they’re not yet fully recovered, which means they have room to grow.
Investors should consider high-yield bonds in moderation. Since average yields are close to 5%, this may help investors earn a higher return outside of equities.
Investment Advice to Live by
Despite the potential of these three asset classes – value stocks, emerging market equities, and high yield bonds – it’s still important to diversify your portfolio. Successful long-term investing is about capturing the gains from a broad range of assets.
Perhaps most important, avoid market timing or rash investment decisions based on fear or greed. Stick with a portfolio strategy that is aligned with your goals, and remain within your risk tolerance when making occasional tweaks to your asset allocation.
If you need help building an investment strategy designed to achieve your goals, please do not hesitate to contact us.