2021 Capital Market Expectations
The Anfield Investment Committee has completed stage three of our four-part annual forecasting process—setting our capital market expectations (CMEs) for 2021. As we have mentioned in the past, we construct portfolios built for a variety of time horizons—our fixed income portfolios are designed with a 1-3 year time horizon, our balanced portfolios are constructed with a 3-5+ year time horizon, and our most aggressive portfolios are constructed with a 7+ year time horizon.
Due to the extremely uncertain environment, we find ourselves in currently, the team has decided to keep our forecasts short in duration vs. the forecasts given last year, which were for a 3-5 year annualized returns for equity sectors (e.g. US Large Cap, Emerging Markets, etc.), while continuing to provide one-year forecasts for various fixed income and alternative markets (e.g. real estate).
In addition, we do not believe market participants (both buy-side and sell-side, and including our own team!) have a crystal ball that allows for accurate, precise forecasts of what equity markets will do over the next 12 months. Although this year many do seem to be positive, if not exuberant in their prognostications. For example, a list of Wall Street S&P 500 price targets for 2021 (Source: CNBC) shows the wide variation and opinions you may find depending on the firm you align with—firms like Morgan Stanley and BAML are generally positive on equity market returns (albeit barely). On the other side of the spectrum are firms like JP Morgan and Goldman Sachs, who are anticipating double-digit equity market returns. One common thread, in contrast to 2020 predictions, is that analysts are generally very positive on returns this year; it just varies as to the degree of their confidence.
Our own forecasts (which can be seen below) show a strong favorability towards U.S. Large Cap, U.S. Small Cap, and Emerging Markets on the equity side of the ledger, with US High Yield and Emerging Markets looking to be the areas of strength in fixed income markets this year. We used a simple ranking to illustrate where our team believes the best performance will come from (relative to each other) during 2021.
It should be noted that the fixed income markets look to be strained in 2021. While we have U.S. High Yield as our top fixed-income area, the potential returns are in the mid-single digits, while Treasuries could have a negative year.
In summary, the Anfield team believes 2021 will be a strong year for the equity market and a difficult year for fixed income markets to end up in the green. With the anticipation of additional stimulus into the markets and what is hopefully an improvement in vaccine distribution, risk assets should benefit. In contrast, with yields continuing to be at all-time lows and the increased debt supply, fixed income markets may have a tough 2021.
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