Technology-backed innovation that will be essential to maintaining productivity and profitability, though labor market gains will come slowly
The pandemic brought on a massive rise in government and corporate debt, and how institutions respond will have a major impact on economic growth in the next decade
Investments in consumer digitalization and environmental, social and governance (ESG) strategies may increase as investors seek opportunities created by transformed behaviors and sentiment
Wilmington Trust today released its 2021 Year Ahead Outlook and Capital Markets Forecast, “Seismic Shocks: The Great Pandemic, Global Reset, and a Transformed Financial Landscape.” The report dives deeply into the macroeconomic factors at play since the beginning of the global pandemic and foresees compelling investment opportunities, particularly in equity market areas such as emerging markets, U.S. value, and technology-related sectoral growth companies. Nevertheless, investors face risks in valuations of growth equities, near-term economic risks for value, including rising inflation, and secular risks due to rising government debt.
This year’s Capital Markets Forecast focuses on three major themes: Pivoting the Business, Paying for the Pandemic, and Navigating the New Market. Wilmington Trust released the report using a fully digital and modular approach, with a central, interactive hub that includes podcasts and webinars with industry experts. The material seeks to evolve regularly to account for continued volatility and market fluidity.
Wilmington Trust will host a series of breakout sessions as part of a press webinar today, discussing the major modules of the report. Later today, the firm will also release its updated positions and allocations for the coming year.
Seismic Shocks: The Great Pandemic, Global Reset and a Transformed Financial Landscape
In order to succeed in this volatile landscape, businesses and governments alike are reevaluating their operations and financial ecosystems, including the need for new technology to increase productivity and its ripple effects on workforces and supply chains. Large-scale government and corporate debt levels will likely have a major impact on macroeconomic forces, as may the possible movement toward new ESG investment opportunities. There is also increasing focus on accelerated digitization of the modern consumer in industries such as retail, payments, and health care.
“COVID-19 has fundamentally affected all sectors of the global economy, causing governments and corporations alike to reexamine their approaches to productivity, technology, consumer behavior, and the supply chain,” said Tony Roth, chief investment officer at Wilmington Trust Investment Advisors, Inc. “The institutions that will recover and succeed in this new environment will need to put resources into new solutions that will drive productivity in a post-pandemic world. For these reasons, we’ve increased our allocations to U.S. large-cap and emerging market stocks.”
Pivoting the Business:
Investment opportunities can be found within affected industries such as real estate, tourism, and retail
COVID-19 is transforming the way businesses operate, causing them to seek new technologies to help drive productivity growth and find greater operational efficiency and innovation to survive in this new normal. However, this rise in productivity will likely be coupled with slower labor market growth as firms work to implement new technology and reorient their workforces to new efficiencies.
“Swifter adoption of new technologies is rapidly transforming business operations as a result of the COVID-induced recession,” said Luke Tilley, chief economist at Wilmington Trust Investment Advisors, Inc. “Looking ahead, those companies that continue to incorporate new technology will see productivity gains. On an industry level, we anticipate that the road to recovery for the travel industry will be long and arduous, with leisure travel well-exceeding business travel for the foreseeable future, and corporate real estate footprints moving out of urban centers and into the suburbs.”
Three industries that have been at the epicenter of the pandemic crisis are also poised to offer investment opportunities:
Real estate: Apartment REITs can potentially benefit from highly effective vaccines
Tourism: Diversified entertainment companies and online travel agencies look well-positioned
Retail: Off-price retail and brands look compelling
Paying for the Pandemic
Debt and rising inflation lead to opportunities with tax-exempt bonds and risks to fixed income assets
In spring 2020, governments around the world tapped into the debt markets quickly and forcefully in response to the pandemic. After a brief period of illiquidity and market dislocation in mid-March, financial markets absorbed the issuance in stride. However, with the virus still rampant in the U.S. and parts of Europe, governments will likely continue to add debt to their balance sheets.
“There are a number of key challenges brought on by the pandemic, creating an ecosystem of volatility and uncertainty,” said Meghan Shue, senior investment strategist, Wilmington Trust Investment Advisors, Inc. “The risk of inflation and escalating debt also loom over the economy. Fixed income investments could be at risk of repricing later in the economic and market cycles, while equities could ride the inflation wave higher as central banks hold back on interest rate hikes. Each country and region will require close monitoring as each will respond in its own way. In short, paying for the pandemic will likely have long-term consequences for all asset classes for years to come.”
Navigating the New Market
The global pandemic provided a shock to consumers’ everyday lives, as they adapted to new health restrictions and a growing reliance on technology. While some of these changing behaviors are temporary, there has also been a fundamental transformation of how consumers interact with the world around them.
Wilmington Trust has taken notice of these changes and is focused on four major areas:
ESG: Investment strategies in this arena have seen a rise in popularity during the pandemic. In addition to promoting good values, the sector offers resiliency for investors, with companies that adhere to ESG principles showcasing a greater ability to pivot in the event of shocks to their traditional business models. ESG investment strategies will likely remain a key component of Wilmington Trust’s portfolio as clients look to balance socially conscious goals with maximizing risk-adjusted returns.
Online retail: This method of purchasing may continue to be a strong growth driver as older shoppers conduct more business online and the scope of goods purchased online continues to expand. In this environment, specialty and internet retail equities stand to benefit.
Contactless payments: Consumer electronics, software equities, and payment services are becoming more popular for investors, with additional U.S. expansion into the space.
Digital health care: There are numerous ways in which tech is digitizing the health care system, including preventative and early detection technologies, telehealth, and digital data. Companies in the fields of internet content and retail, health care information tech, and software could benefit in the long term.
“While trying to cater to all stakeholders is not a novel concept for corporations, ESG has opened a real opportunity to create a framework for balancing the interests of all constituents with the common goal of maximizing the value of the firm over the long run,” said Roth. “With a strong correlation to quality, defined by a firm’s profitability, financial leverage, lower volatility, and overall stability, we believe stakeholder capitalism has an opportunity to move to center stage permanently, and broad corporate commitment makes it clear this movement has true staying power.”
For more on the 2021 Wilmington Trust Capital Markets Forecast, please visit https://bit.ly/3mheRnK.
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