Emerging markets, the U.S. and the U.K are most likely to reward investors next year, according to top fund managers polled by trade body the Association of Investment Companies.
Although many developing economies have been hit hard by the COVID-19 pandemic, 24% of managers polled by the AIC tipped emerging markets as the best bet for 2021, while 19% were positive about the U.K., and 19% about the U.S.
On a five-year view, emerging markets and Asia Pacific, excluding Japan, were seen as the most attractive opportunities, each receiving 19% of the votes, with the U.K. and U.S. tied in second place with 14% of responses each, the poll found.
“Over the coming years, we expect further significant positive economic development in particularly Asia and Latin America, as well as Africa,” said Carlos von Hardenberg, manager of the Mobius Investment Trust MMIT, .
“We believe that a rotation back into emerging markets will lead to a normalization of the large discount emerging markets are trading at today, and solid corporate earnings will be accompanied by improved macroeconomic tailwinds,” he added.
The poll was carried out with AIC member investment company managers between Nov. 9 and Nov. 30, 2020.
Emily Fletcher, co-manager of BlackRock Frontiers BRFI, +0.85%, said that developing economies were expected to emerge from the crisis without the excessive debt burden of many Western economies, and at the same time displaying higher growth levels. “Although hit hard by the global lockdowns, frontier economies have displayed a remarkable resilience, helped by the flexibility of their labor forces.”
Health-care equipment and services is the favored equity market sector for next year, while companies in the travel and leisure sector — one of the hardest hit by the pandemic — is expected to recover strongly over the next five years from a “catastrophic” 2020.
“Near-term, banks and the travel and leisure sectors are likely to bounce strongly as investors make a rational analysis of their prospects rather than extrapolating the awful short-term trends from 2020,” said Andrew Bell, chief executive of investment trust Witan WTAN, -0.46%.
The threat of the COVID-19 pandemic receding as vaccines are set to be rolled out across the globe was the greatest cause for optimism by managers next year, gaining 38% of the votes. Managers are also positive about technology driving economic growth.
Investment company managers were also bullish on the prospects for global stock markets, with 67% expecting they will rise in 2021, and only 10% believing they will fall.
Nearly two-fifths of managers feel the FTSE 100 will close between 6,500 and 7,000 next year, while a third were more optimistic about the U.K.’s blue-chip index, with 7,500-8,000 (19%) and 7,000-7,500 (14%) the next most popular choices.
Simon Gergel, portfolio manager of the Merchants Investment Trust MRCH, -1.04%, said that the U.K. was becoming investible again after four and a half years in the wilderness.
“Like we saw after the promising Pfizer PFE, -4.64% COVID vaccine trial results, the end of uncertainty over Brexit is likely to lead to fundamental reassessment of U.K. equities, which are some of the cheapest amongst the major world markets. Within the market, value shares and domestic cyclicals look particularly interesting.”
Job Curtis, fund manager of the City of London Investment Trust CTY, -0.28%, said that, after underperformance compared with the average of world stock markets, the U.K. has the capacity to surprise to the upside. “In general, stocks with above average dividend yield with growth should be well supported given continuing low interest rates,” Curtis said.
However, the poll showed that the biggest threat to portfolios next year is the prospect of interest rate rises, followed by high equity valuations.
Despite the economic fallout from the COVID-19 pandemic, 90% of managers believe U.K. interest rates won’t turn negative in 2021, and 71% feel it is either ‘unlikely’ or ‘very unlikely’ that we will see a significant increase in inflation. It is a different picture on a three-year view, with 77% of managers believing a significant increase in inflation is either likely or very likely.