Expect less volatility in 2021, but uncertainties remain

George Maris: So it is an interesting question whether volatility will persist into 2021. Mathematically, it’s hard to imagine that we will keep at the same pace that we have had in 2020. We literally had the highest volatility reading in markets of all time in March of 2020 and that is persistent throughout the year. The reasons for [this] are not particularly mysterious – pandemic and lockdowns, elections, Brexit, social unrest… It has been global in terms of the volatility and it has been all-encompassing, and that has certainly filtered into the economy and markets.

So thinking forward, will that likely persist in 2021? You know, the hope is that it won’t, however, I would bring you back into February of 2020 and we all had a view of clear sailing ahead. And so it shows you the folly of predicting volatility, geopolitical and macro events. There is no certainty there and we need to be prepared for issues going forward. We still need to make sure that the pandemic and the lockdowns get taken care of. And with the news of the vaccine certainly helping, we also need to see what the geopolitical transitions are like throughout the world. You are still having unrest in the U.S. with respect to what the election outcomes are going to be, what that means politically, and then from a trade and stance with a lot of our partners around the world, we clearly have issues with respect to Brexit and the continent. So we do have a lot of issues still confronting us and we need to be prepared for that.

As I think about the most critical upside drivers for equities in 2021, I think the obvious one is being able to get the pandemic under control. A vaccine would be the most critical element here; that would provide the greatest way of managing this and getting everyone back to a state of normalcy. And you will also have a substantial increase in supply. As you can imagine, a lot of businesses haven’t been able to operate at full capacity given the dislocations from the pandemic and you will start to see inventories build up as well.

I think you will also potentially benefit from an increase in inflation; a moderate increase is what is key here. One, it is a sign of emerging growth. In addition, it is also helpful for businesses to generate operating leverage. Most businesses generate greater earnings when there is more top line inflation and that will certainly be beneficial for equities going forward.

I think lastly it will be geopolitical stability and political stability, whether it is with respect to a gridlock in the U.S., a positive resolution of Brexit in Europe and other … and a normalization of trade relationships around the world. From a negative perspective, continued further issues with the pandemic, where it is not being held under control, where we need further lockdowns and the societal harm continues to increase, that would be one of the biggest risk factors out there. Similarly, geopolitical tensions. We don’t know what politics is going to look like in 2021. It is important, it drives lots of critical decisions. I do worry about what happens if we have an increase not only in terms of regulation, but really if we have a change in terms of the turn towards the private sector.

So some of the key features to think about in terms of 2021 from an investment landscape … well, one, it would be clearly be ESG. How we embed that and make that a true part of what we do is critical. And we at Janus Henderson need to be much more thoughtful about how we can truly influence better risk and return outcomes by incorporating ESG. I think a second element that we need to be very cognizant of are what are the lasting secular changes that have occurred and pushed forward as a consequence of behavioral changes due to the pandemic. A lot of them have been technological in nature, you got more flexibility from working arrangements, a greater employment of technology going forward. There has been an extraordinary amount of advancement or behavioral change that has happened in the last 12 months, and we need to see how much of that persists and how much of that will change the world going forward.