With a tumultuous 2020, investors are starting to set their sights on another investment landscape in the new year.
Pension consumer demand, increased cash levels and the rapid introduction of successful COVID-19 vaccines could put the stock market on the resonance of 2021, Tony DeSpirito, director of investment in BlackRock's U.S. fundamental equity, said in a recent client note.
But a rapid economic recovery and a return to normal life could lead to a strong reversal of the trend for stock market investors in early 2021, DePirito said.
According to BlackRock, the world's largest asset manager, there are three key trend reversals to watch when 2021 begins.
Since the Great Recession, the stock market as a whole has been characterized by a steadily rising tide that has lifted all yachts, with the S'amp;P 500 index rising by almost 500% from a low of March 9, 2009 until the end of 2019.
Stable and moderate economic growth, accompanied by low interest rates and limited inflation, contributed to broad stock market growth, widening the gap between passive and active investing.
But then came the COVID-19 pandemic, accelerating the rapid recession and economic recovery that now serve as the backdrop for identifying winners and losers in the stock market. This creates a favorable environment for the return of active stock collection, Despirio explained.
"We expect investors to move beyond "obvious winners" and invest cash in shattered sectors and stocks that could benefit from the recovery. Generally speaking, this is where active investing can have an advantage over index tracking," Despirito said.
For the first time in more than a decade, new opportunities are opening up for value-building investors as they seek to eventually reach a level of relative superiority over growth. This possibility has been reinforced since the announcement of positive data on COVID-19 vaccines from Pfizer and Moderna in November.
Investors should prepare for a value rotation because cyclical stocks, which have a strong link to economic growth and currently show low valuations, "should enjoy a big rebound with the recovery of the market and the economy," according to DeSpirito.
The share price usually drives the market higher in the early stages of the economic recovery from the recession, the note said.
As companies begin reporting profits next year, it will be easier for the securities to beat its disappointing 2020 performance than growing businesses that have a higher bar to impress investors, DeSpirito said.
In addition, share buybacks could bring in big profits in 2021, as CEOs will become more confident in their prospects for the future. This would be a boon for the shares, "since buying shares at a lower price has a more proportional impact on the value of the remaining shares," Despirito explained.
Dividends, as well as share buybacks, were one of the first victims of the pandemic as corporations sought to strengthen their balance sheets in order to survive the ensuing economic downturns. These dividend cuts have deterred investors looking for income, even as lower bond yields continued to make income-oriented stocks more attractive.
But dividend cuts peaked in May and have since stabilized, Despirito said.
"We expect dividend growth to resume in 2021 as the proliferation of vaccines and greater clarity generally give management confidence in releasing excess cash in the form of dividends and buybacks," the note said.
As long as interest rates remain lower for a long time around the world, company dividends are likely to provide better returns than bonds for some time, Despirito said, adding that the optionality of rising dividends overshadows the fixed maturity of bond coupons.
"Dividend growth, which has been exacerbated over time, is a compelling proposition in the context of the sub-1% yield of the US Treasury," DeSpirito said.