5 Wall Street firms — including the world's largest money manager — share their 2021 outlooks for the stock market and where they are recommending that clients invest in the year ahead

  • After the wild ride that is 2020, many Wall Street banks and money managers are bullish about the US stock market and the global economy in the year ahead. 
  • However, at the same time, they are also particularly sanguine about the prospects for emerging markets and international stocks.
  • We've compiled some of their best recommendations for how to maximize returns in a year where hopes for revived global growth and a return to normal are likely to send stocks to a new high. 
  • Visit Business Insider's homepage for more stories.

2020 is truly a year like no other.

Despite a global pandemic that crippled economies, sent millions into unemployment, bankrupted companies, and crushed earnings, the stock market, which plunged into the fastest and shortest bear market in history in March, appears set to end the year on a record high. 

Heading into 2021, Wall Street strategists are betting on an extended rally in the stock market, driven by a steady economic recovery, more government stimulus, accommodative Fed policies, and most importantly, a suite of COVID-19 vaccines that returns life to normal. 

BlackRock: going pro-risk in 2021

Among the most bullish forecasters is the $7.8 trillion money manager BlackRock, which upgraded US equities to overweight on a six to 12 months basis. 

"We are turning more pro-risk going into 2021," said Jean Boivin, head of the BlackRock Investment Institute, on a Monday media roundtable. "This is going to be largely pinned to the expected broad rollout of the effective vaccines, which has increased our conviction that we're building a bridge to a broader economic restart, which has room to accelerate over the course of 2021."

In the medium term, BlackRock sees an "unusual" combination of rising inflation and stable low yields, which further supports stocks as real rates continue to fall. 

"We think this combination of both rising inflation and the muted yield response is under-appreciated by markets," Boivin said. "And this will have profound implications on the role of government bonds in portfolios, but also we think is good news on a strategic basis for risk assets and equities in particular."

BlackRock also believes that COVID-19 has rewired globalization and turbocharged transformations, which has ushered in new investment themes tied to country diversification and sustainable investing

"We think COVID-19 has accelerated these geopolitical transitions, including towards a bipolar world between China and the US, and this, as a result, will have the key implication of making direct regional diversification more important in portfolios," said Boivin. 

He added: "The COVID crisis has turbocharged transformations… One key example is sustainability and we see sustainability as a source of returns that will be playing at the sector level going forward."

BNP Paribas: a continued rotation into value

While the street broadly retains a bullish tone for stocks in the year ahead, some analysts are less optimistic about the pace and extent of the rally next year.

"We have a constructive view on the outlook for equities, but we are expecting much more modest pace of gains for next year than we've seen in the rally from the lows this year or indeed in the last month where we've had some extremely strong returns," said Greg Boutle, head of US equity & derivative strategy at BNP Paribas, on a Monday market outlook.

To solidify his market view, Boutle examined the market through the lens of valuation and positioning. He found that although stock valuations are elevated, they are still much more conservatively priced when compared to bond yields. 

As for positioning, prior to March, Boutle sees high levels of short positioning in the volatility space, excessive use of leverage in the futures space, and a lot of overleveraged quantitative strategies.

Some of those metrics have since recovered but none of them have reached anywhere near pre-crisis levels, according to his observation. 

"We think that if we remain in an environment in which earnings are positive and volatility is gradually declining and that rates remain very low," Boutle said. "In a hunt for yield and hunt for return, investors are going to be increasingly drawn into equities, and we do think there is still money on the sidelines, dry powder that will be put to work into equities."

Within equities, Boutle's biggest single call for 2021 is a continued rotation into value, which his team implements somewhat differently than the traditional value investors, he said. 

"We think things like price-to-book for noncapital intensive industries don't make an awful lot of sense, so we're trying to focus more on things like forward P/Es, but adjusting those metrics for leverage, things like forward free cash flows," he said. "We think those are some better metrics."

He added: "We think next year, we could see the rotation into value happen at a more modest pace and we think there could be more of a focus on investors adopting a sustainable approach. We think some of the industrial cyclicals and some of the more value-orientated tech names could be a much better way to play this."

JPM and Wells Fargo: EM over DM

Betting on US stocks tends to pan out given its history of upward trajectory, but many strategists are also predicting a boom in international and emerging markets stocks in 2021. 

"We do think that this re-acceleration in the pace of activity will be a global phenomenon," said David Lebovitz, global market strategist at J.P. Morgan Asset Management, in an interview. "I think that the policy response that we've seen in other parts of the world has been much more robust than what was observed coming out of the financial crisis, and as a result, the starting point for international markets is much more favorable than was the case coming out of 2018."

Within international stocks, Lebovitz sees "tremendous value" in emerging markets stocks, a sentiment echoed by Sameer Samana, senior global market strategist at Wells Fargo Investment Institute.

"We think developed markets have some structural and some cyclical headwinds, whether that's hiring and firing people, whether that's Brexit, we think they'll be a little bit slower to recover. It's the one asset class where we don't think earnings will hit all-time highs next year," said Samana on a Tuesday market outlook media briefing. 

He continued: "So we think emerging market equities, we have a lot of different things going for them, whether it's the rising middle class, whether it's commodity stabilization, whether it's sector allocations that now mirror US large caps with technology and consumer discretionary, all of those will probably benefit EM over DM."

Natixis: China and ESG

The COVID-19 pandemic has accelerated transformations that were already in motion before March.

While most investors have focused on the overnight digitalization of the economy, two portfolio managers from Natixis Investment Managers' Mirova and WCM Investment Management shared on a Tuesday market outlook media call what they will be keeping their eyes on in 2021. 

Amber Fairbanks, a portfolio manager at Mirova, said that the market has underestimated the risks coming from poor ESG practices and the Biden administration's policies could drive the growth of sustainable companies in the year ahead. 

"He has committed to spending $2 trillion on clean energy, electricity, and transportation in the building sectors, he plans to recommit the US to the Paris Climate Agreement, he also plans to reach net-zero emissions for the US by 2050 at the latest," said Fairbanks. 

She added: "So the specific targets he's outlined within this proposal are extremely aggressive and really should drive growth for alternative energy companies as well as companies involved in the electrification of vehicles and building product companies that are involved in creating energy-efficiency buildings."

Mike Tian, portfolio manager at WCM, said he is monitoring where the US-China relationship could go from here. 

"On a high level, I think it's pretty clear that the US and China are strategic rivals. It remains to be seen whether we're truly adversaries or not," Tian said. "This obviously affects a very broad range of investment themes and companies and industries."

From trade-related names, tech companies, and electric vehicle-makers, the trade relations between the US and China could exert a lot of knock-on effects, but Tian is excited about exploring the China A-share market in 2021. 

"Overall, China [market] is like $14 trillion or 15 $trillion this point, it is huge and there are 5000 or 6000 listed companies, it's very very liquid," he said. "At the same time, even though it's a huge market, it's a very inefficient market, which is 80% driven by retail flows and trading volume. There's really not a lot of fundamental investing there."

He added: "I think that China is probably one of the biggest and last frontiers sources of alpha for active managers left in the world. And we're pretty hopeful that we're going to be able to exploit that over the next five or even 10 years."

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