Although the incoming economic data are likely to remain poor until around mid-2021, we forecast that “risky” assets will continue to outperform “safe” ones comfortably over the next couple of years as a whole. We also anticipate that this will be accompanied by a further rotation within risky asset markets – generally favouring the sectors, factors and regions hit hardest at the start of the pandemic – as well as more weakness in the dollar. The obvious counterargument to the view that risky assets will outperform again is that their prices have already risen a long way, in many cases more than making up the ground lost when the virus struck. Yet, with a handful of exceptions, we do not think that their valuations are unsustainable, for a couple of reasons. First, recent changes in central bank thinking suggest to us that risk-free rates will be kept extremely low for years to come, even once economic activity bounces back. And second, we believe that risk premiums can fall further. That is what usually happens in the early stages of economic recoveries, and this time the unprecedented lengths that policymakers have gone to in supporting risky assets recently may also be fresh in investors’ minds.
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