Expect slow start followed by accelerated recovery in 2021, Transamerica’s CIO says

After a year of volatility triggered by the pandemic, investors finally can see light at the end of the tunnel. However, they should not unfasten their seatbelts quite yet.

“As the second wave of COVID-19 inflicts exponentially rising damage throughout global society, the markets strive to look to the other side of the virus as high-efficacy vaccines have been developed,” said Tom Wald, chief investment officer for Transamerica Asset Management.

“However, as widespread distribution of these treatments could still take months, investors may need to brace for slowing rates of economic growth and market volatility in the early part of 2021 before the recovery accelerates in the spring and summer months, providing a favorable backdrop for investors as the year moves forward.“

Wald outlined his predictions for the coming year in “Where We Stand in 2021: Transamerica 2021 Market Outlook.” Here is what he’s anticipating:

Election aftermath sees market preference for split-party control: “The aftermath of the presidential and congressional elections has allayed pre-election fears of a contested outcome. History infers a market preference for split-party control of the White House and Congress.”

Economic growth in second half of 2021: “While U.S. economic growth could be challenged in the first quarter as COVID-19 cases continue to rise, we look for the economy to accelerate meaningfully in the second half of 2021 as vaccine accessibility dovetails with an accommodative interest rate environment and eventual fiscal stimulus, driving pent-up demand by consumers and businesses.”

Opportunities in stocks follow downside risks: “We believe there are strong long-term opportunities in U.S. stocks; however, investors may need to incur some downside risks during the first few months of 2021 before the vaccines reach widespread distribution.”

Low short-term interest rates: “Short-term interest rates should remain in a lower-for-longer environment as the Federal Reserve maintains the Fed funds rate at a lower bound of zero for the foreseeable future.”

Equity investors find opportunities: “We believe there could be attractive opportunities for long-term international equity investors given the expected global economic recovery in 2021.”

Wald also shared Transamerica’s portfolio positioning for the coming year:

Stocks over bonds: “We favor stocks over bonds within balanced or asset allocation portfolios. as the upside appears greater for equities based largely on recovering economic and corporate earnings growth.”

Chance to rebalance: “Investors may want to rebalance into small- and mid-cap stocks with gains achieved by large-cap stocks.”

International market allocations: “Establish or increase international developed and emerging market allocations based on potential global recovery.”

Bond portfolios: “Fixed-income investors should consider keeping bond portfolios below benchmark durations, as we believe there is a high probability the yield curve will steepen during the year.”