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Investment outlook 2021 - Legacy of the lockdowns


  • The global economy faced a crisis of unprecedented magnitude following the coronavirus pandemic lockdowns. A sharp global contraction in early 2020, and possible renewed dip in Europe in the fourth quarter, should nonetheless be followed by a rebound in growth in 2021.
  • Several vaccines for COVID-19 should become widely available in 2021, but until then countries will increasingly need to ‘live with’ the virus as repeated lockdowns will not be a sustainable coping strategy.
  • In 2020, advanced economies loosened the monetary and fiscal reins most spectacularly. Debt-to-GDP ratios soared, rising for many countries by more than they did in the years after the Global Financial Crisis (GFC). Major central banks have largely financed the increase in budget deficits, monetising an expanding national debt, much as Japan has done.
  • How will all this debt be paid for? The appropriate historical parallel is the post-World War II period, when central banks capped bond yields at levels well below the trend GDP growth rate to gradually reduce the national debt as a proportion of GDP. The prospect of sustained low yields argues for a structural long duration position, or at least a strategy to buy duration on any meaningful back-ups.
  • Global growth may well be lower after the pandemic is over. Inadequate fiscal stimulus would leave marginal sections of the economy vulnerable to collapse. Such an outcome would test the Goldilocks paradigm of modest growth, low inflation and supportive central banks that has supported asset prices since the 2008 GFC.
  • Today we face three interconnected crises – health, economic and climate. The instability provoked by the pandemic presents a window of opportunity to pivot in a new direction. Long-term environmental viability, equality and inclusive growth are essential pre-conditions to a sustainable economy. By taking a holistic, systemic, long-term view, we are less likely to be surprised by crises and better able to manage them.


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Global US Europe Emerging markets


The coronavirus pandemic is one of the most significant in history. This is not because of the number of deaths, however, which have been low relative to previous pandemics, but because of the dramatic changes in geopolitics, economic activity, consumer behaviour, and indebtedness that have followed the imposition of nationwide lockdowns in many countries.

So far, with over 1.2 million deaths globally, about 0.016% of the world’s population has died due to coronavirus. This is half the rate of the Hong Kong flu of the 1970s and one-fifth of the toll of the Asian flu of the 1950s. The Spanish flu at the end of World War I was estimated to have killed up to 50 million people when the global population was one-quarter of today’s level.

The coronavirus pandemic has been much less lethal because governments responded to the threat in an unprecedented fashion. Previous pandemics saw limited containment measures and consequently had a relatively modest economic impact. The response to coronavirus by contrast has led to the biggest decline in global GDP growth since World War II (see Exhibit 1). The permeation of technology in modern economies in part explains the difference in response. The internet has enabled a significant share of the population to work from home, a situation that was impossible 40 years ago.

Exhibit 1 Change in world GDP

Economies will nonetheless recover; growth is forecast to rebound to 5.2% in 2021 (Bloomberg consensus estimate). But even as aggregate demand rises, particularly after the arrival of a vaccine, the world will be a profoundly altered place. We will travel differently, shop differently, work differently and be entertained differently. Geopolitics will be different as China’s economy advances relative to other countries that managed the pandemic less well. Growth rates across countries will diverge as more flexible economies re-allocate labour and capital more easily to future growth areas.

Some of the changes will stem from changes in mentality, for example, the realisation that one does not need to fly thousands of (polluting) kilometres for a face-to-face meeting when a video call will suffice. Or to travel to the office every day.

Some of the differences will result from the dramatic increases in country indebtedness as governments financed businesses and households through the lockdowns. The end of the austerity mentality will also make it easier to finance the large investments needed to combat climate change.

Some of the changes will come because businesses fail to survive lengthy or repetitive closures. These are some of the legacies of the lockdowns.


The US economic recovery will likely be aided by at least some fiscal stimulus even if not the multiple trillions of dollars that investors had hoped for prior to the election. Few significant legislative changes can be expected given a divided Congress, meaning that the Federal Reserve and interest rates will resume their traditional, primary role in the economy.

Policy rates will be steady; with the Fed’s new average inflation targeting framework, the central bank will not raise rates, even if the fiscal stimulus turns out to be much larger than we now expect. Quantitative easing and muted inflation expectations look set to keep longer-term rates low, allowing the economy to recover from the lockdown recessions.

The strength of the rebound will depend on how quickly consumer spending returns to pre-pandemic levels. In contrast to the global financial crisis, when swings in business investment drove gross domestic product (GDP), this time it has been consumer demand.

Personal consumption expenditures are still 2% below end-of-2019 levels, but there is wide dispersion in the growth rate across categories. Money that was not spent on activities either prohibited or unattractive under lockdown (going to a restaurant, for example) was instead directed towards what one could actually do (buying home furnishings) (exhibit 2). Services expenditure should recover in 2021 as restrictions are eased further and the availability of a vaccine allows transportation and leisure activities to resume.

Exhibit 2 change in personal consumption expenditures


Europe faces a more daunting task to rebound from the collapse in GDP during 2020. While the US is expected to return to its pre-pandemic level of GDP by the end of 2021, a full recovery is not forecast for the eurozone until the end of 2022. Europe’s labour markets have so far suffered far less from the lockdowns than those in the US thanks to more generous unemployment benefits, lengthier furlough schemes and extended bans on firings. The EU unemployment rate has risen to just 7.5% from a pre-pandemic low of 6.5%, while the US rate had reached 14.7% already in April, but has since dropped below 7%.

This resilience comes at the cost of flexibility, however. It is not simply a matter of tiding workers over till a vaccine is widely available, the pandemic has passed and everyone returns to their old ways. Many industries will need fewer workers (hospitality, retail), while others will need more (technology, warehousing). The comparatively low rankings of some of the larger European countries in the World Bank’s Ease of Doing Business survey (Spain 30, France 32 and Italy 58) reflects this inflexibility.

Many eurozone governments have responded to the economic damage from the lockdowns with massive fiscal aid, either direct from the state or through the new Next Generation EU programme. Debt-to-GDP levels have consequently soared, increasing for many countries by more than they did in the years following the Global Financial Crisis (see Exhibit 3).

Exhibit 3 change in debt-to-GDP ratio

In the short term, the resulting fall in creditworthiness should not lead to higher interest rates or drag on growth since the ECB is buying the bulk of the debt. Interest expense is low (at just 3.6% of GDP for the EU in 2019), again thanks to the ECB. Part of the debt is even ‘interest free’ since the interest that governments do pay on debt purchased by the ECB via the respective national central banks is paid back to the country’s Treasury.

The risk in the medium to long term is that interest rates rise or the ECB begins to run down its balance sheet, but for now governments are able to borrow enough to cushion the blow of the lockdowns, but not necessarily enough to restore growth to pre-pandemic levels quickly.

Another reason for the slower recovery in the eurozone is the limited scope for the ECB to ‘do more’ in a way that has a meaningful impact on growth or inflation. In 2021, the central bank is expected to adopt a new inflation target closer to the US Federal Reserve’s symmetric 2% target, recalibrate its quantitative easing programmes, adjust its longer-term refinancing operations to possibly allow banks to borrow more at an even cheaper rate for longer, and perhaps make a small cut in the deposit rate.

While such moves should be helpful, we note that interest rates are already near historic lows in many markets, banks are reluctant to lend and businesses are loath to borrow. It is only once a vaccine is widely available and governments lift restrictions that the region’s economies can hope to return to trend-rates of growth.


Emerging markets suffered similar declines in GDP as developed markets following the lockdowns despite deploying far less fiscal or monetary stimulus, meaning they face fewer risks from higher debt burdens than the US or Europe. The recovery into 2021 should be aided by what we expect to be robust growth in both the US and China. Domestic demand-orientated fiscal stimulus in the US should pull in exports from many emerging markets. China’s recovery, while perhaps less commodity-intensive than in the past, should still support activity in the wider Asian region. Emerging Europe, the Middle East and Africa may benefit less since their exports are oriented more towards a slower-growing Europe (see Exhibit 4).

Exhibit 4 emerging markets' exports to China and US

In the same way that the COVID lockdowns have led to a divergence in the outlook for the US and Europe, China is distancing itself from developed economies. Thanks to the country’s effective management of the pandemic, GDP has already regained the losses from the lockdown, and this without the resorting to quantitative easing, negative interest rates, or a big increase in government debt.

One potential concern over the medium term is the acceleration by the pandemic of the de-globalisation trend begun by US President Donald Trump. There is broad consensus in Washington for a more distant relationship with China. Even with a new administration, trade relations are unlikely to change much (the Democrats have traditionally been more sceptical towards trade agreements).

COVID has encouraged governments and companies to bring manufacturing production closer to home. However, China is not the same economy it was when it joined the World Trade Organisation in 2001. The manufacturing sector then was nearly 10% larger than the services sector, whereas today services is nearly twice the size of manufacturing. Net exports contributed to China’s growth in the years leading up to the GFC, but over the last five years, growth has come much more from consumption, while the contribution from net exports is near zero.

China’s recent 5th Plenum highlighted domestic demand growth, import substitution and technological self-sufficiency as the main growth drivers. ‘Greening’ the economy by reducing carbon emissions and improving environmental protection will also be a priority. We believe China will aim for, and likely achieve, 5% to 6% annual growth in the next several years.


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Equities Fixed income Currencies & commodities


2021 will be a story of recovery irrespective of how the pandemic evolves in the US and Europe. Future waves of the virus may well necessitate mini-lockdowns, with the inevitable negative impact on growth and corporate profits, but as we saw already in the rebound in growth and profits in the third quarter of 2020, a bounce-back should come quickly. While the structural changes from the pandemic and the lockdowns have reduced the long-term earnings growth potential in certain sectors, the scope for growth in other sectors has improved (see Exhibit 5).

Exhibit 5 change in long-run earnings growth rate estimates

Valuations are elevated relative to historical averages, but this primarily reflects supportive central banks, low interest rates and low inflation. Central banks have set aside their reluctance to monetise government debt and their support now extends to buying corporate bonds (including high-yield). The one part of the market where to some investors, index valuations appear quite high is US technology. The median price/earnings ratio of the stocks in the index is far less elevated, however, suggesting that there are still good opportunities for stock pickers.

Emerging markets should benefit from an improved tone in international trade relations, even if the fundamentals of US trade policy do not change radically. A growing US economy will still pull in exports from emerging markets despite a continued ‘buy American’ bias. The recovery in EM domestic demand may lag given the inability of many countries (or their unwillingness, as in China’s case) to compensate households for the loss of income from the lockdowns. On the positive side, repeated waves of infections appear less likely in emerging markets since the pandemic is either already under control or is further along its natural course towards burning itself out. Emerging market valuations relative to developed markets appear quite reasonable and we expect to see emerging markets make up some of their underperformance from the last decade.


Major central banks will likely maintain policy rates near or below zero percent for several years. They have little choice but to fund the increases in budget deficits that have followed the lockdowns, monetising an expanding national debt, much as Japan has done. The European Central Bank has already made it very clear that in 2021 it intends to buy as many bonds as needed to prevent monetary conditions from tightening for all eurozone governments. Consequently, G3 sovereign debt markets are now driven to a worrying degree by technical factors.

The appropriate historical parallel is the post-World War II period, when central banks capped bond yields at levels well below the trend GDP growth rate to gradually reduce the national debt as a proportion of GDP. The implication is that government debt managers and central banks are likely to coordinate the maturity profiles of issuance and purchases to engineer low real yields over coming years. This argues for a structural long position, or at least a strategy to buy duration on any meaningful back-ups.

In such an environment, the search for yield in fixed income will likely underpin valuations in corporate debt markets. The primary concern for credit investors is to differentiate between those industries that will be permanently damaged by the pandemic and the lockdown recessions and those which are only temporarily out of favour. It is equally important to avoid those sectors whose prices have been bid up as investors seek out safe havens, but which are at risk of significant underperformance – primarily in the US – as the economy recovers and fiscal stimulus boosts growth and inflation expectations.


The US dollar stands to benefit from the relative strength of the US economy, but this should be offset by fiscal stimulus and widening US budget and current account deficits. The dollar also looks expensive historically.

The direction of the US dollar against the euro may depend primarily on the relative expansion of the money supply in the two regions. While the ECB may increase its bond buying programmes in December, the Fed is likely to be more aggressive, shifting the balance in favour the euro (see Exhibit 6).

Exhibit 6 US dollar-euro echange rate and monetary base

There is more scope for emerging market currencies to appreciate against the US dollar given that they have recovered far less from the sell-off in the spring of 2020. Valuations look attractive on a REER (real effective exchange rate) basis. Reduced imports have helped stabilise current account balances in several EM economies and foreign exchange reserves have also remained quite resilient.

A continued global cyclical economic recovery should support commodities prices, even if China’s expansion will be less commodity-intensive than in the past. Gold and silver prices should be supported by stable low real yields, but there is likely little potential for significant further gains.


Lockdowns will leave much of the world with more debt and leave many industries permanently damaged, but also create new opportunities. Most importantly, the pandemic has changed our view on what kind of world we want to live in – one that is more environmentally sustainable and safer – and it has reinforced our commitment to achieve it. That will be the lasting, positive legacy of the lockdowns.



It is clear that the pandemic of 2020 has given rise to a cycle of low growth and high debt in which security selection rather than asset allocation will generate added financial value.

We believe the pandemic has the potential to trigger a more sudden realignment, reinforcing technological innovations, commercial trends and movements in politics. This is bound to lead to major shifts in economic activity, corporate earnings and ultimately asset valuations.

Disruptive change, in other words. As an investor, we ask: how do these deeper socio-economic trends impact companies around the world and what are the investment opportunities that arise from them?

Assessing the opportunities  involves applying strict environmental, social and governance (ESG) selection criteria. This approach also features in our choice of investment themes to manage the ‘great instability’ as it continues in 2021.


Towards a low-carbon economy

As we progress towards a low-carbon economy, wind and solar power generation as well as biofuels have an established foothold, but there is still significant potential for growth. Improved fuel cell and battery technology holds the key to efficient electrification.

The trend towards decentralised energy production is creating opportunities in energy infrastructure, distribution and storage, while digitalisation helps improve energy efficiency in industry, buildings and homes. Moves to scale up green hydrogen production and use should create a multi-billion dollar market.

While the pandemic made most of the headlines in 2020, wildfires and hurricanes still raged, floods still smothered cities and land, and earthquakes still made thousands homeless. Climate change continued, and in a welcome development, governments included spending on sustainability in their billion dollar plans to support growth and jobs, raising hopes for a green recovery.

Governance remains a hot topic. Investors must be alert to the possibility of radical shifts in the regulatory and anti-trust framework in which companies operate and the impact on valuations this would have.


The pandemic could prove to be a catalyst in the availability, cover and affordability of healthcare. It could also lead to the greater use of technology including artificial intelligence to develop cures and innovation in drug delivery and miniaturisation.

We expect spending on healthcare to rise to address apparent capacity and coverage issues. There will be considerable concurrent expenditure in the biotech and pharmaceutical sectors to fight the pandemic with tests, antivirals and ultimately a vaccine.

Innovation & disruptive technology

Remote working has become the norm, setting off greater demand for technology and innovative solutions ranging from tele-conferencing to cloud computing access. E-commerce has taken off. Increasingly, the possibilities of e-medicine are attracting interest.

Big data, artificial intelligence and data analytics are seen more and more as essential tools to manage the pandemic and to solve major economic, demographic and societal questions.

Chinese equities

In 2020, the Chinese economy grew by almost 5%, without the authorities having to suppress interest rates through quantitative easing, or dramatically increasing the government debt burden by stimulus spending. All other major economies saw growth fall. Not only is China likely to remain the fastest growing large economy in the world, its equity market boasts numerous innovative companies.

Yet China remains underweight in many international investors’ portfolios. In the post-pandemic world, investors should consider a standalone allocation to Chinese assets. The renminbi strength in 2020 partly reflected overseas money flowing into China’s asset markets. Chinese government bonds currently yield around 3%, dwarfing bond yields in advanced economies.

Leading bond and stock index providers have added China to their main emerging market benchmarks. In the coming world order, China offers investors opportunities.

To find out more about these investment themes discussed and how to invest in them, visit our ‘Great Instability’ site



In 2020, environmental, social and governance equity indices were tested for the first time in a bear market. They did not give up performance compared to traditional benchmarks. This was a critical test as it constituted the first significant market downturn that truly challenged the resilience and performance of ESG-based equity investments.

The World Socially Responsible and World ESG equity benchmarks have outperformed traditional global equity indices over the past three years (see exhibits 7 and 8 below). We believe this reflects the strong correlation between high ESG scores and high quality companies, where well-managed businesses with resilient characteristics have outperformed in the downturn.

Exhibit 7 socially responsible ESG equity indices have had more attractive Sharpe ratios
Exhibit 8 Barclays MSCI global green bond index outperformed Barclays global aggregate credit index

The green bond market is growing fast

In the year through 30/10/2020, total cumulative issuance of green/social/sustainable bonds surpassed a trillion US dollars, reaching about USD 1,179 billion equivalent (eq).

As of the end of October, total issuance of green bonds stood at around USD 403.8 billion eq. With two months of the year still to go, global green bond issuance in 2020 already exceeded the USD 274 billion overall supply in 2019.


Europe is still expecting the green bond market to grow further in 2021. If fully enacted, the Resilience and Recovery Fund (RRF), which seeks to mitigate the social and economic impact of the pandemic, could contribute to the substantial expansion of green public investment policies. The RRF would boost green public investment via employment programmes across the eurozone. This has the potential to create investment opportunities across the sustainability sector as countries implement green policy measures.

European sovereigns continue to lead the way in sovereign bond issuance

Our bond market teams expect first-time green issuance from Italy in 2021 (EUR 3-5bn), the UK (GBP 5-7bn) and Denmark (EUR 1-2bn equivalent), all in the first half of 2021. France and Germany are expected to issue additional green bonds as well, with France targeting EUR 5-7bn and Germany EUR 4-6bn. Most green bond issuance, apart from the last German sovereign issuance, have seen maturities of 10 years or longer, so we would expect similar issuance in 2021.

A high level of detail should be delivered through China’s 14th five-year plan

China’s plan to become carbon neutral by 2060 was welcomed by the European Union, which called it a ‘possible game changer’. The country’s 14th five-year plan, to be released in March 2021, may lay out details around how China plans to reduce its consumption of coal-generated electricity. If it does, the result could be a net inflow of investment opportunities in renewable energy equities.

Central banks explore climate change risk in relation to price stability

Central banks are continuing to debate their role in climate change risk mitigation, with questions ranging from what the impact is on price stability mandates to what central banks can actively do to help promote environmental sustainability.

The intensity and scope of their view will vary, depending on the mandate of the central bank; the Bank of England plans inclusion of a climate scenario in its stress tests for banks. The ECB is considering adapting traditional central bank tools towards mitigating climate risk.

ECB President Lagarde has acknowledged that the ECB may consider whether a green TLTRO refinancing facility would be appropriate and useful. More than 80 central banks, supervisors and other authorities have now joined the Network for Greening the Financial System (NGFS), a number likely to grow further in 2021.

The energy transition

As demonstrated by China’s announcement of targeting carbon neutrality by 2060, the focus in the international dialogue on how to mitigate climate change has shifted towards achieving net-zero emissions by 2050. As a result, many leading companies, asset owners and a growing number of governments are setting carbon reduction targets.

This should accelerate the energy transition and benefit suppliers of renewable energy sources and electrification and battery solutions, among others.

As outlined in our recent research paper, we see green hydrogen as a key technology in helping the world achieve net-zero emissions by 2050. Carbon-pricing regimes will be needed globally to give green hydrogen commercial viability, first as a feedstock, and then as an alternative to natural gas and petrol.

The scaling-up of green hydrogen production and distribution – initially in the EU – will involve building an industry virtually from scratch at a cost of billions of dollars over several decades. Such a development will be on a scale similar to the proliferation of solar and wind power generation and promises to present many equally attractive investment opportunities.

This market is expected to reach USD 150 billion by 2030, including the building of thousands of refuelling stations and the production of fuel cell cars to replace combustion engine vehicles.


We believe that in this area, as well as in other sustainability-related fields, there will be considerable opportunity in 2021 to invest in those high quality companies best positioned to realise the ongoing transition to a low-carbon, environmentally sustainable and inclusive economy.

Taking a long-term view, identifying investments that address the great instability of our time, and that are resilient, are essential to achieving enduring sustainable returns.

Watch the below video to understand our approach to corporate social responsibility, or visit our Insights page for our latest thinking on sustainable investing.

For our views on the economy and various asset classes as well as future investment opportunities, read our comprehensive outlook Legacy of the lockdowns

Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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