Angela Ashton, founder and director of asset consultant Evergreen Consultants, suggests that TINA – or ‘There is No Alternative,’ to equities, that is – will be one of the driving themes of 2021 for investors. After outperforming the Chant West superannuation benchmarks, delivering a return of 4.93% from its balanced option for 2020, Evergreen now expects a ‘benign cyclical recovery’ to be the key force for markets in the 12 months ahead.
Despite flagging some potential risks around the rollout of the vaccine, an economic recovery supported by low interest rates and QE policy is the clear base case, which Ashton believes will see growth assets continuing to outperform defensive assets. Importantly, this assumes that interest rates do not rise significantly during the year, which in the worst case would result in the revaluation of ‘long-duration growth stocks’ which have benefited from cheap access to capital.
In terms of positioning the firm’s model portfolios, Ashton highlights three preferences and changes that have been made in recent months. Following on from the expectation that interest rates will remain low, and that yields will rise only modestly, Evergreen remains overweight to credit, despite taking some profits where yields had compressed significantly. The recent preference has been for higher-rated credit issuers, but the team will remain active in the sector, seeking to increase its allocation to higher-yielding securities as opportunities present themselves.
Evergreen believes exporting regions including Japan, emerging markets and (in particular) Australia, should outperform and pave the way for a further rotation into value and cyclical stocks. As long, of course, as we can keep our US$ exchange rate at a reasonable level. By no means is Evergreen suggesting the growth story is dead, rather that its relative attractiveness has reduced. Duration may not have transferred to growth stocks, the FAANGs for instance, which have benefited significantly from lower interest rates boosting their access to capital.
In light of Evergreen’s views on interest rates and yields, the firm suggests fixed income markets will remain relatively unattractive for some time to come, even if there is no surprise jump in inflation.