Risk factors on the rise — including unexpected inflation increases and political power plays

A new age of engagement, as investors increasingly consider diversity, climate change and other environmental, social and governance (ESG) issues in their portfolios 

16 December 2020

New research from Mercer, a global leader in redefining the world of work, reshaping retirement and investment outcomes, and unlocking real health and well-being, outlines the major themes, opportunities and economic forecasts that investors should consider when positioning their portfolios for 2021 and beyond.

“Nonstop social and technological change has increased at a rate as exciting as it is bewildering, and COVID-19 has resulted in an acceleration within that acceleration,” said Deb Clarke, global head of investment research at Mercer. “The pandemic has expedited significant changes in pre-existing trends, some of which we believe may recede somewhat as the public health threat diminishes due to factors such as mass vaccinations, but we think that others such as online retailing and  sustainability, are here to stay. It pays to be aware of these and invest accordingly.”

In a paper titled “The Great Acceleration: Themes and opportunities 2021,” Mercer’s researchers identify three overarching themes that Mercer believes will impact investment decisions in 2021 and beyond: 

• The new world: Monetary and fiscal institutions are piloting new techniques in an effort to ensure economic stability and continuity as a result of the pandemic, while global allegiances and working relationships are being re-cast. This may have an impact on inflation, risk considerations and the appeal of opportunistic investment strategies.

• Business as unusual: As some enterprises struggle to adjust to post-COVID-19 reality, and credit markets settle into the new normal, there will be opportunities in private credit, for example in restructuring finance and distressed debt. Unconstrained managers in public markets may also be able to find yield pickups from assets subject to ratings downgrades from investment grade (fallen angels).

• Position for transition: Institutional investors seeking to mitigate risk should consider a climate-transition plan to assess their portfolios’ ability to weather the move to a more sustainable future.  

Beyond these critical investment themes, Mercer’s research also examines recent economic factors and how they could play out in 2021. 

In the first half of 2020, government-imposed lockdowns and various restrictions in response to COVID-19 devastated the global economy, with growth weakening by more than 30%[1] (seasonally adjusted annual rate).

Economic activity was quick to restart as lockdown measures were lifted, leading to a sharp bounce in growth. Especially in light of promising vaccine news, the global economy is expected to continue growing strongly and making up lost ground in 2021.

The pattern of growth in China and some parts of East Asia is different from the rest of the world because their impact by COVID varied amongst themselves and also with their counterparts in Europe and the US. In China, following a sharp contraction in activity during the first quarter of 2020, the economy started to recover. It didn’t take long for it to break past the pre-coronavirus levels and is now well on track to recover to where it would have been had the virus never happened. 

The Japanese economy, which was struggling even pre-pandemic, has bounced back by 21% (seasonally adjusted annual rate) with another 8% growth forecast for Q4. However, the pace of recovery from this point will depend on a similar set of factors to that of the Eurozone and the US: government stimulus, virus dynamics, business spending and the way the global economic recovery drives export demand.

Janet Li, Wealth Business Leader Asia at Mercer said, “The pattern of growth is not uniform across the markets in Asia, particularly those that continue to be weighed down by restrictions. We expect many Asian markets (ex-China) broadly to follow the trajectory of developed markets. Barring significant risks such as further and sharp deterioration in the US-China relationship that would prompt conflicts on trade and technology fronts or uncontrolled outbreaks of the virus, we believe growth in the Asian economies should continue to rebound and eventually get back to where it would have been pre-COVID.”

“The human and economic cost of COVID-19 has been enormous. That said, from an economic standpoint, the crisis has led to new and innovative businesses and to the evolution of existing businesses,” said Rupert Watson, head of asset allocation at Mercer. “We have seen big winners and some losers along the way. When the economy returns to where it was prior to the pandemic, its composition will look different thanks to changes to working practices and the use of technology.”

This paper, titled “The Road to Recovery: Market outlook 2021,” also foresees a rebound in corporate earnings and a positive environment for equities in the year ahead. Both the investment-grade and high-yield markets are expected to continue performing well, while the US dollar could weaken.

More detailed insights on Mercer’s research can be found in these two papers:

·       The Great Acceleration: Themes and Opportunities 2021

^{[1] Bloomberg Economics global GDP growth measure: cumulative growth over the first two quarters of 2020}

·       The Road to Recovery: Market Outlook 2021

About Mercer

Mercer believes in building brighter futures by redefining the world of work, reshaping retirement and investment outcomes, and unlocking real health and well-being. Mercer’s more than 25,000 employees are based in 44 countries and the firm operates in over 130 countries. Mercer is a business of Marsh & McLennan (NYSE: MMC), the world’s leading professional services firm in the areas of risk, strategy and people, with 76,000 colleagues and annual revenue of $17 billion. Through its market-leading businesses including Marsh, Guy Carpenter and Oliver Wyman, Marsh & McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit www.mercer.com. Follow Mercer on Twitter @Mercer.

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