By T.  Rowe Price | Jan. 22, 2021 

David Giroux, Chief Investment Officer, Equity and Multi‑Asset 
Justin Thomson, Chief Investment Officer, International Equity 
Mark Vaselkiv, Chief Investment Officer, Fixed Income

Key insights

• New coronavirus vaccines offer a potential lift for economies in 2021. However, a spike in COVID‑19 cases could slow recovery in the first quarter.
• Economic improvement could shift spending from firms that gained during the pandemic to cyclical names damaged by it, potentially favoring value over growth.
• Fixed income investors will need to be creative in 2021, as low yields and tighter credit spreads could make attractive returns harder to find.
• Social and economic upheaval caused by the pandemic could worsen political divisions. Tensions between the U.S. and China are another potential flashpoint. 

The 2020 global pandemic tested the ability of companies and investors to manage their way through an unforeseen and dangerous period. However, T. Rowe Price investment leaders believe the other side of that journey could come into view in 2021 if new vaccines and continued fiscal and monetary stimulus add momentum to the economic recovery.

Rapid progress with a first wave of new vaccines based on messenger RNA (mRNA) technology clearly is the most hopeful sign, says David Giroux, chief investment officer (CIO), Equity and Multi‑Asset.

A broader economic recovery is likely to benefit many of the sectors that were most damaged by the virus, such as travel, leisure, energy, and financials, notes Justin Thomson, CIO, International Equity. However, technology, e‑commerce, and home delivery firms that saw sales surge during the pandemic could face tough earnings comparisons.

A stronger recovery in 2021 would carry risks for bond investors, warns Mark Vaselkiv, CIO, Fixed Income. He says investors will need to be creative in seeking out fixed income sectors—such as floating rate bank loans and emerging market corporates—that potentially can do well in a rising interest rate environment.

In the opening months of 2021, the short‑term economic risks from a worsening pandemic could weigh on global equity and credit markets, Giroux says. However, economic and earnings growth could improve dramatically later in the year if the new vaccines can rapidly bring down infection rates.

But a 2021 earnings recovery might not translate into continued strong rallies in global equity prices, Giroux cautions. To a large degree, he says, an economic and earnings recovery already has been priced in by the markets. “Expectations are high, so we could see good earnings results but still see the market trade off a bit.”

Thomson thinks global equities could perform reasonably well in 2021, helped by the same factors that propelled the 2020 rally: supportive fiscal policy and ample monetary liquidity. “It feels to me like there’s still a lot of money on the sidelines that could make its way into risk assets,” he says.

For fixed income investors, 2021 could be challenging, as the falling yields and tightening credit spreads that boosted broad market returns in 2020 aren’t likely to play that role again. Rather, extended durations and the potential for a modest revival in inflation could make managing interest rate risk a portfolio priority, boosting the appeal of floating rate assets.

In both equity and credit markets, T. Rowe Price investment leaders say, the uneven impact of the pandemic and the recovery on countries, industries, and individual companies is likely to make strong fundamental analysis and skilled active security selection a critical component of investment success.

The views expressed in this commentary are those of this fund manager as at the date of publication and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax or legal advice. Prospective investors should review the offering documents relating to any investment carefully before making an investment decision and should ask their financial advisor for advice based on their specific circumstances. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. Unit values and investment returns will fluctuate.

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