(London) Aviva Investors, the global asset management business of Aviva PLC, sees a potent combination of economic drivers underpinning a strong global recovery in 2021, resulting in an above-consensus outlook for growth. Although uncertainties remain, the COVID pandemic is passing, and successful roll-outs of vaccination programmes are allowing economies to reopen. Pent-up demand, large savings buffers and ongoing fiscal and monetary policy support will all help boost the recovery.
Despite worries about virus mutations and renewed lockdowns in a number of regions, businesses and households have shown themselves to be impressively resilient and resourceful. Successive waves of the virus have had less impact on real economic activity as both have adapted to sometimes rapidly changing circumstances.
Monetary policy is expected to remain supportive throughout 2021 and 2022, with recent changes in approach to meeting their inflation objective allowing central banks to keep policy looser for longer. The COVID reset has helped fuel major changes in the fiscal environment, with many countries shifting to bolder and larger interventionist demand management policies. The US is in the vanguard of such changes.
Michael Grady, head of investment strategy and chief economist at Aviva Investors, said:
“Given our strong growth expectations, as well as the balance of risks, we prefer to be overweight global equities, especially in US and UK markets. We are modestly underweight emerging market equities because of the anticipated headwinds from higher US bond yields, weaker local currencies and tighter domestic monetary policy.
“Higher sovereign bond yields largely reflect the brighter economic outlook as well as increases in public borrowing. Central banks maintaining rates near the effective lower bound will keep the short end of yield curves anchored, but there is scope for longer-term yields to rise further. As a result, we prefer to be modestly underweight duration.
“The upside from tighter credit spreads appears to be more limited, given the narrowing that has already taken place, so we prefer to be slightly underweight. We are mostly neutral on currencies, with the previous mildly negative view on the US dollar now more nuanced, given the more rapid growth trajectory expected there compared to other regions.”