False dawns or the start of change? The 12 key investment views and trends for 2021

Managers give their sector predictions for next year

2021 is just around the corner, and hopes are rising that certain sectors will bounce back. Should investors get carried away or approach with caution? 12 investment experts give their predictions on how areas such as ESG, global equities and artificial intelligence will fare next year.

Adrian Hull, head of UK fixed income at Aegon Asset Management

UK fixed income

The policy of central banks will be key to returns in 2021. It is reasonable to expect that policy rates, quantitative easing (QE) and other monetary policy tools will be actively used throughout 2021. But there could be fearful anticipation of their removal. Should vaccines prove swift and effective, the lockdowns and disruption caused by Covid-19 will fade.

The Bank of England will want to see Covid-19 dealt with before any removal of current policy tools. Thus, we expect gilt yields to move moderately higher - measured in basis rather than percentage points.

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Covid-19 scars will remain, economic growth will play catch-up, but the Treasury predict 2019's GDP not being reached until after 2025. The index-linked market will dominated by the changes in demand emanating from RPI reforms and historic lows yield against increased "linker" supply and premature expectations of inflation from the economic rebound.

Credit markets enter 2021 benefitting from strong buying and "full valuations". As the world normalises, there is still room for the most affected sectors (such as hospitality and leisure) to perform. But better-quality credit is priced as expensively as any time over the past quarter of a century.

The global high yield market still has potential with a good vaccine outcome; single B credits can still outperform BBs. The starting point of higher coupons will give investors comfort and protection should there be a whiff of "normalisation" of central bank policy. Brexit, while overshadowed by Covid-19, remains a wildcard.

A rewind of the measures put in place in 2020 will be slow, but the painful experiences of removing accommodative policy in Europe in 2011 and the US in 2013 still casts long shadows over central bank thinking.

Simon Young, portfolio manager at AXA Investment Managers

UK income

David Stevens, group CEO at motor insurer Admiral, said in August: "A year ago I described our results as 'frankly a bit dull'. With the benefit of hindsight, there is a lot to be said for 'dull' if the alternative is a global pandemic."

As an income fund manager, who has seen huge cuts in dividends across the UK stock market in 2020, I wholeheartedly agree. We expect the overall reduction for dividends paid by UK companies to be around 40%-50% in 2020.

The good news is that with an effective vaccine starting to be rolled out and consumers adapting to live with social restrictions, we are seeing corporate results start to improve.

One hangover from the pandemic will see some companies emerge with more stretched balance sheets, especially in the travel and hospitality sectors. In these cases, boards are understandably likely to prioritise debt reduction before dividends are resumed.

For the wider market we are more optimistic, with banks and real estate investment companies likely to return to the dividend lists in 2021 and we have started to see a resumption in dividends from a wide range of companies from motor insurers to industrials.

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I would be surprised if dividend growth was less than 10% in 2021. In absolute terms, the UK stockmarket's dividend yield of around 3% looks attractive (and this level is after the cuts I mentioned) and is not too far out of kilter with its 30-year average of 3.5%.

A casualty of central bank monetary policy, which has been to flood financial markets with liquidity, have been savers. Deposit rates at high street banks are barely above zero and even tying your money up for 10 years in UK government bonds (gilts) will currently earn less than half a per cent per annum, if held to maturity.

To put this paltry interest rate into context, data from the Office for National Statistics show that since 1949, in only one year (2009) was inflation lower than the current interest rate from 10-year gilts.

These do not feel like favourable odds to me for savers looking to growth their money in real terms (i.e. above inflation). So for those with a longer-term horizon, UK equities look good value.

The dividend yield on the market is comfortably in excess of inflation and well above interest rates, we have the prospect of dividend growth and historically dividends growth has exceeded inflation.