WHAT OUR MANAGERS THINK…

…About THE ECONOMY

CLEARBRIDGE INVESTMENTS

2021 could produce the best economic growth in 20 years and may roll into an impressive 2022

• Consumers are flush with savings and pent up demand.
• Corporate balance sheets are flush with cash which may spur capex spending, dividends and share repurchases.
• We see new business formation skyrocketing, which could spur job creation and GDP growth.
• Recent stimulus is a standalone positive, and the Fed’s shift in 2020 to an “average inflation target” sets a higher bar for the reduction of stimulus. We believe the Fed will allow the economy to run hotter than they would have in the past.

WESTERN ASSET

Game-changing vaccines recalibrate a brighter future

• Fiscal and monetary policy should stay supportive.
• The second half could see a burst of economic growth with reopening.
• Global economic slack, debt burdens, labor market scarring, small business devastation and bankruptcies may take years to fully absorb.
• Reignition of inflation is still years away, and interest rates should stay range-bound.
• The dollar should weaken only mildly.

BRANDYWINE GLOBAL INVESTMENT MANAGEMENT

Macro take: Post-pandemic boom?

• The pandemic has triggered a major regime shift in US inflation policy.
• After 40 years of guarding against any whiff of inflation, striving for fiscal balance, and keeping monetary and fiscal policy separate, the new regime emphasizes a commitment to inflation through zero-rate monetary policy and an advocacy of increased fiscal stimulus.
• This shift, coupled with many traditional macro indicators point to better global economic growth in 2021.
• The world recovery by the end of this year could be very surprising.

…About US EQUITIES

FRANKLIN EQUITY

Digital transformation is just getting started

• In a low-growth, low interest rate world, we believe investors will continue to look to equity markets for attractive investment opportunities relative to other asset classes.
• Trends that have driven equity markets higher since the start of the pandemic, such as digital transformation (DT) and innovation in the technology, health care and consumer sectors, are likely to continue. 
• We believe DT will have a long-term positive impact on the broader market and that it will only accelerate from here. Companies that have embraced DT and continue to use it as a key enabler of their businesses should deliver greater performance over the long run, in our view.
• While short-term investors may rotate out of technology and into other sectors positioned to benefit on the return to some semblance of normalcy as vaccines are deployed, we believe that the secular eventually beats the cyclical and that it would be short-sighted for long-term investors to exit the tech space.

CLEARBRIDGE INVESTMENTS

A better year for dividend stocks

• We believe cyclical and value-oriented sectors should continue to outperform growth while small cap companies should continue to outperform large caps in anticipation of a rebound in profits. 
• In an environment where interest rates should remain historically low and after a difficult relative year in 2020, we expect a better year for dividend stocks, which offer more attractive yields relative to fixed income and the potential for growing payouts.
• While technology valuations have expanded, growth has expanded as well and the major trends reliant on software and services remain in place. The pandemic accelerated those trends and we expect technology stocks will continue to grow faster than the overall market and should remain a healthy component of diversified portfolios.

…About FIXED INCOME

FRANKLIN TEMPLETON FIXED INCOME

No single asset class is an unequivocal buy

• The most interesting opportunities in fixed income assets provide more attractive yield pickup without taking on too much duration.
• The biggest opportunities lie in active credit selection to pick the sectors and names with the soundest fundamentals.
• While many risk assets have already priced in the recovery, we anticipate they will outperform government assets given strong demand in the face of an extended low rate environment. 
• Selectivity by country, by sector, by asset class, and within asset classes by industry and individual issues, is required.

WESTERN ASSET

Inflation is likely to remain subdued

• We believe central bank policy rates will be very low for very long.
• The market embrace of the speed and optimism in renewed inflation may be misplaced. Interest rates seem likely to be largely range bound.
• Reopening spread products should outperform Treasury and sovereign bonds, in our opinion.
• Investment grade bonds appear fully priced. Whenever rates back up, however, foreign buyers have come in so they don’t appear to be overpriced.
• The bank loan sector is attractive relative to high yield bonds after meaningfully underperforming last year.
• Emerging market debt is an opportunity, though volatile. Prices are distressed and the valuation gap is likely to close going forward. The local currency bonds may benefit from a mildly weakening US dollar.

…About ALTERNATIVES

K2 ADVISORS

Active alpha expected to trump slowing beta momentum

• Macro—emerging markets: Positive tailwinds of rebounding growth and policy support. Increased dispersion at the region, country and asset class levels.
• International long-short equity opportunities as dispersion arises from uncertainty. Lower valuations offer downside support.
• Long/short credit managers are increasingly focused on event-driven situations given low yields and tight spreads.
• Insurance-linked securities—Higher than average insured losses due to COVID-19 and natural catastrophe activity is lifting reinsurance pricing. The market offers attractive ILS spreads in the lower-risk period prior to the next hurricane season.

…About REAL ESTATE

CLARION PARTNERS

2021 likely to mark a new real estate market cycle

• We expect demand to continue to recover across most markets and property sectors.
• Rising occupancy and higher effective rents should drive higher net operating income, supporting higher dividend and property appreciation.
• While a dramatic rise in inflation is not likely, the risk of moderate inflation over the medium term has increased. “Income with growth” can be an important part of portfolio allocation in such an environment.

…About GLOBAL EQUITIES

MARTIN CURRIE

European valuations relatively attractive

• Key central banks are signaling rates will remain on hold at historically low levels. The shift in approach to inflation targeting potentially supports equities, but underlying deflationary pressures from technological advances, disruptive trends and pandemic-induced low wage pressure, remain at play.
• The improving macroeconomic picture points to strong double-digit corporate earnings growth estimates for the MSCI World Index, and significantly higher for the narrower MSCI Europe (ex-UK) Index.
• Equities in Europe appear more attractive than in the US, based on valuation.
• We believe that given such an unusual period in terms of earnings collapse and rebound in 2020/21 respectively, cyclically adjusted valuation multiples are more relevant than stand-alone PE ratios, which look demanding versus historic levels.
• Equity valuations generally remain attractive to us in terms of the earnings yield they offer compared to bond yields. This is likely to remain the main argument for an ongoing rerating of equity markets, given the strong signaling by the main central banks that rates will remain low for extended periods of time.
• Overall, we believe it will be a year based on lower tail risks and increased optimism.

FRANKLIN TEMPLETON EQUITY

Lingering uncertainty, regional opportunity

• The economic effects of COVID-19 will remain the main story in 2021.
• Regionally, we continue to see opportunities in China and other Asian emerging markets. We expect them to rebound more strongly from 2020’s economic weakness than many developed markets.
• Japan holds promise. We believe Japanese companies have done a better job of improving their balance sheets than investors have given them credit for, which creates fundamental opportunities.
• In Europe, we are seeing a leadership change out of the UK, given its large exposure to energy and financials, and towards Switzerland, with its large emphasis on health care and pharmaceuticals. We expect this trend toward defensive growth areas to continue in 2021.

…About EMERGING MARKETS

FRANKLIN TEMPLETON EMERGING MARKETS EQUITY

An exceptional investment window

• The resilience of key markets in East Asia during the crisis, paired with their ability to capitalize on secular shifts to the new economy, should drive continued strength next year.
• Laggards, including India and Brazil, could well benefit from a uniquely accommodative environment of negative real rates (and an undervalued currency in Brazil), paired with ongoing reform efforts and excess capacity in the economy, boosting growth.
• This broadening of economic recovery should continue to drive improved earnings visibility into 2021 and amounts to a compelling opportunity across emerging markets as a whole—both from a near-term tactical perspective as well as structurally.
• For so many different markets across this landscape to concurrently offer compelling investment potential, individually and in aggregate, presents an exceptional investment window, in our assessment.