Investors have had to endure a lot in 2020, with many asset classes initially sent reeling by the Covid pandemic, before rallying in the face of an unprecedented series of stimulus packages from central banks and governments around the world.
From negative oil prices to record levels for gold and US equities, 2020 has been anything but run of the mill for investors.
With a new President set to take the helm in the US, Brexit, environmental concerns and sprawling government debt piles, there are lots of new challenges for investors as we head in to 2021, but also lots of opportunities.
Below, Franklin Templeton’s specialist investment managers look at what is facing major asset classes next year (each day different specialist investment managers tackle different asset classes).
Small Caps – Royce Investment Partners (Francis Gannon, Co-CIO)
We see a synchronized global recovery gradually unfolding, supported by the vaccines and the lagging impact of massive monetary and fiscal stimulus.
All of this should continue to reward global small caps -and cyclicals in particular. Both are overdue for reversions back to market leadership. In November 2020 U.S. small caps just completed their best month in the history of the Russell 2000 Index, gaining 18.4% in November, while the Russell 2000 Value Index advanced 19.3%.
While one month does not constitute a trend, the shift toward both small caps and value would appear to reflect the emerging transition to a broad-based economic recovery premised on a vaccine and subsequent widespread reopening.
We would expect November’s rotation to continue, though we also anticipate volatility and consolidation.
We saw a surprisingly robust state of third-quarter earnings for many small-cap companies. Earnings will be paramount to equity market performance going forward, especially in small caps, as strong earnings rebounds offset declines in valuation. In addition, earnings comparisons should be quite forgiving through most of next year. However, we also continue to believe that selectivity will be key because economic activity is likely to remain uneven as growth continues to rev up.
We continue to focus our attention on the individual opportunities at hand and watch out for companies that look attractively inexpensive and capable of growth in an improving economy. Some examples can be found in cyclical end market sectors or consumer stocks that would be immediate beneficiaries of a vaccine and a return to normal human behaviour.’
Real Estate – Clarion Partners (David Gilbert, CEO and Chief Investment Officer)
Before the COVID-19 pandemic, US real estate market fundamentals were extremely healthy, with strong demand, robust conditions and historically low vacancy rates in almost every US market.
There was a lot of liquidity in the marketplace and, as National Council of Real Estate Investment Fiduciaries Property Index (NPI) data show, most investors’ returns reflected the excellent conditions.
Below is our outlook for four major commercial property sectors.
Industrial: Industrial properties have been a perennial favourite over the last six to seven years as demand drives the need for new space. A phenomenon more than a decade in the making has been growing e-commerce sales, which have been accelerated dramatically by COVID this year. Warehouses, in particular, are benefitting from the increased desire to shop virtually. As demand grows for one-day or even same-day deliveries, e-commerce companies are building new types of fulfilment centres that are closer to major population centres.
Multi-family: An analysis of over 40 years of data shows that the apartment sector has been the single most resilient property type. Despite COVID-related job losses, we find that people are generally continuing to pay their rent. In fact, we believe there’s a lot of pent-up demand in the multi-family space, with 23 million young adults still living with their parents. In many states – California, in particular – there is a housing shortage. From a long-term perspective, sector performance will be dictated by job growth, job creation and wage increases.
Office: There will be less demand for office space by virtue of the need for flexibility as people continue to work from home. However, we believe, in the future, flexible arrangements will mean three or four days in the office and two days working elsewhere. This may reduce the footprint of office properties a bit but there’s still a compelling need for collaboration, culture building, training and onboarding that are extremely difficult to do remotely.
One particularly bright spot is life sciences real estate/lab office space – a unique high-growth sub-sector. Although indistinguishable from the outside, lab office spaces have very specific air circulation, power and ceiling heights requirements, for example, that make them more expensive than typical offices designed around cubicles. We see lab office spaces in clusters and often near major universities – in Cambridge, Mass., for instance.
Retail: It’s clear that the retail sector is challenged but, putting aside malls and some high street locations, there is a huge swath of solidly performing necessity retail properties. Specifically, we are focused on neighbourhood or community shopping centres that are anchored by food and drug stores that all of us will continue to visit, e-commerce notwithstanding.