Investors looking for income can turn to bond opportunities outside the United States in 2021, according to John Queen, fixed income portfolio manager at Capital Group, a global financial services firm based in Los Angeles with $2.1 trillion in assets under management.
“It is important for investors not to reach for income, but there are going to be opportunities in the fixed-income markets,” Queen said during a Capital Group press discussion about the future of the market and economy.
“We are likely to see a weaker dollar over the next few years, which is going to be good for emerging market bonds and for emerging markets in general,” Queen said. “Fixed-income investments outside the U.S. can be a diversifier for a portfolio.”
In the United States, the mortgage market and municipal bond market will offer investment opportunities, he said.
However, investors need to be careful about what they are buying. For instance, for state and municipal bonds, investors need to determine which states and municipalities will be able to meet their financial obligations, and which may not. “Active management will play an important role here,” he added.
The economy as a whole “is telling us it expects a recovery in 2021,” said Jody Jonsson, an economist and equity portfolio manager at Capital Group. “2020 gave us the fastest financial downturn and the fastest rebound in history. Most people thought the bottom would have been drawn out much longer. We are expecting not only a return to 2019 levels but a period of explosive growth in 2021 and 2022.”
The pace of the recovery will depend in part on whether there is more stimulus money approved, whether people get a Covid-19 vaccine when it is available, and how quickly people regain confidence in the economy, she added.
Jared Franz, an economist with Capital Group, added the caveat, “Until we get to herd immunity [with a vaccine] for the pandemic, we will face issues.” If the vaccine is successful and distributed rapidly, the economic recovery may become more V-shaped instead of U-shaped, he added.
Two factors are helping the recovery, Franz said. One is that the economic stimulus for Covid has come much more quickly than the financial crisis stimulus in 2008 and 2009. The second thing is that the gridlock from a government divided between Democrats and Republicans should rein in the extremes of both sides.
No matter what shape the recovery takes, there will be some sectors that get left behind. Small businesses and real estate have not done well, and retail and energy are ripe for disruption, Franz said. At the same time, the health sector and technology will be the winners. Jonsson added that areas such as travel and entertainment that cannot be digitized are going to remain at a disadvantage.
Interest rates will remain low well into the future—through 2021 and even further, Queen said, and inflation will re-emerge eventually, but slowly.