Section 1: Q1 2021 Outlook


Now Is an Opportune Time to Make an Allocation to Global Macro Strategies

Global Macro is an investment style that is highly opportunistic and has the potential to generate strong risk-adjusted returns in challenging markets. Against a backdrop of the current pandemic, uncertainty, and potentially increased volatility, we felt it would be timely to share our insights on the approach and explain why we believe now could be an opportune time to make an allocation to Global Macro Strategies.

The impact of the macro-economic environment is different among different asset classes and changes over time. Global Macro driven investment decisions are particularly important in high uncertainty/high volatility environments where macro factors exert a meaningful influence on asset pricing. These types of environments affect factors such as interest rate differentials, foreign exchange balances, and the consequent over and under valuation of asset classes and sectors, which may be exploited through nimble and tactical positioning.

Perhaps the most universally accepted concept of prudent investing is to diversify, yet this concept grossly oversimplifies the challenge of portfolio construction. The goal of diversified investment management is to earn the highest return while meeting the risk tolerance criteria of an investor through asset allocation and selection. Asset allocation models can be defined as Conservative, Moderate Growth, Growth, and Aggressive Growth or by Defensive, Defensive Balanced, Balanced, Balanced Growth, and Growth. Regardless of the labels, the risk profiles for these models are mandated to reflect the risk tolerance of the clients who invest in them.

When asset classes are combined in a portfolio, the amount and direction of each change over time will benefit or hurt the overall risk of the portfolio. Correlation is a statistic that measures the degree to which two variables move in relation to each other. In optimal portfolio allocation, if all stocks tend to fall together as the market falls, the value of diversification is lost. Negative correlations describe a relationship between factors that move in opposite directions. Negative correlations are of particular interest in the financial world since negatively correlated assets move in opposite directions. Asymmetric correlation occurs when correlations behave differently in negative environments than they do in positive ones. Correlations between asset classes, measured over the full sample of returns, have been found to demonstrate this behavior.


Diversification Disappears When it is Most Needed

Numerous studies that have examined correlation asymmetry support a finding of the undesirable variety: characterized by high positive correlations among asset classes in negative markets when low and negative correlations are needed, and low or negative correlations in upside markets when high and positive correlations are needed.i ii iii However, Global Macro strategies exhibit appealing downside correlations relative to equities, bonds, and other hedge fund strategies. This can be well understood given Global Macro’s lower exposure to systematic liquidity risk and systemic deleveraging risk.


Portfolio Construction: Manage Portfolio Correlations Rather Than Static Asset Allocation



Asymmetries in upside and downside correlations have also been found to exist between stocks in a single market, as well as across markets internationally.iv The “neutral” asset allocation of 60% of a portfolio held in stocks and 40% in cash, bonds, and other financial assets that does not adjust will experience asymmetric correlations in negative markets, as will asset allocation ranges above and below 60/40. Asymmetric correlations also have similar implications in risk management when looking at the behavior of bonds.

Frame Global Asset Management uses a Global Macro approach. We consider the outlook for the global economy relative to a view of expected U.S. GDP growth in the twelve months ahead. The outlook falls into one of our five broad descriptions: GROWTH, STAGNATION, RECESSION, INFLATION and CHAOS, allowing for a transitioning in the period from one environment to another as well as recognizing total regime shifts. (See White Paper 2).v

We define Growth, Stagnation, Inflation, Recession and Chaos as the following:

Growth: U.S. Real GDP growth greater than 2.5%
Stagnation: U.S. Real GDP growth between 0 and 2.5%
Inflation: U.S. CPI greater than 3.5%
Recession: U.S. Real GDP less than 0%
Chaos: All asset classes exceed a correlation threshold

In doing this, we can recognize the changing correlations among asset classes and adjust when they change. The historical monthly return data of over forty asset classes is tagged using rules to assign each month with one of the five environments. From this tagging, expected return distributions are created by drawing from twenty years of return data using bootstrapping (random sampling with replacement) from past economic environments that are similar to what is anticipated in the coming twelve months. The twelve-month forward outlook and updating of expected return distributions is updated monthly.


We Measure What Matters: The Degree to Which a Given Asset Diversifies the Main Growth Engine When It Underperforms

Our own research shows that when historic data for asset classes is partitioned under these broad economic environments, patterns of behavior emerge. This allows us to create portfolios using ETFs that are the closest proxy to the asset classes that are used in the modelling process. Using ETFs, we can specifically address expected returns among the asset classes being considered while also addressing the probability of negative returns in those asset classes in the anticipated economic environment.

Global Macro investments tend to perform best in high uncertainty/high volatility environments where macro factors exert a meaningful influence on asset pricing. We believe today’s markets will remain in a state of disequilibrium over the next year, making current asset valuations increasingly fragile.

It is not enough to evolve a portfolio within equities or fixed income in environments where all equities or all bonds are highly and positively correlated or correlated with each other. In these environments, it is important to recognize the correlations and the lack of diversification benefit. In these negative return environments, it is important to have permission, within investment policy across the risk sensitivity spectrum of clients, to shift to low and negatively correlated asset classes. This involves the consideration of global equities as well as broad fixed income and market capitalization.

The current environment seems to be one in which Global Macro is well positioned for successful portfolio management.



Section 2: Four Themes


Theme 1: Greater Global Co-Operation

A meeting of central bankers and finance ministers from 19 of the world’s largest economies plus the European Union – the G20 – was held in early April to discuss issues facing the global

• The G20 acknowledged the improved global economic outlook due to vaccination campaigns and continued policy supports, especially in advanced economies, while focusing on the uneven recovery across and within countries. It committed to protect those most impacted, including “women, youth, informal and low-skilled workers.”

• The G20 extended the Debt Service Suspension Initiative (DSSI) until end-2021, recognizing the unique challenges faced by low-income emerging markets (EMs). 46 countries have requested debt relief worth $12.5 billion. The new extension would cover an estimated $9.9 billion in bilateral debt payments.

• The G20 called on countries to “develop forward-looking strategies regarding climate change and environmental protection, investing in innovative technologies and promoting just transitions toward more sustainable economies.” Climate change took a backseat during the Trump era but is likely to retake center-stage in future post-pandemic meetings.

• The Group talked about reforming the WTO. This is important because the pandemic has accelerated protectionism, increased deglobalization pressures and made countries more inward-looking.

• The G20 also called for cooperation for a “globally fair, sustainable and modern international tax system.” A global minimum corporate tax would allow the U.S. to raise additional revenue from U.S.-based European companies and other multinationals.


Theme 2: Inflation Threat Brewing

We define an Inflationary environment as periods when the year-on-year realized CPI increases beyond 3.5%. Central banks globally generally target 2%. For decades, inflation has not been a problem in developed markets. Both monetary and fiscal policy have contributed to economic circumstances that are disinflationary, rather than inflationary, resulting in lower and less volatile inflation.

Today, inflationary regime change concerns point to four factors.

First, there has been an unprecedented increase in money creation. US M2 has grown by $4.2trn, from $15.5trn to $19.7trn in one year (to February 2021).vii

Second, there has been extraordinary fiscal accommodation that needs to be financed. The Congressional Budget Office (CBO) estimates a U.S. fiscal deficit of $3.1trn in 2020, or 15% of GDP. The CBO forecasts the deficit will shrink to $2.3trn in 2021, or 10% of GDP. In the entire modern history of the US, there have only been two instances of consecutive double-digit deficit years.viii

Third, the bond market is signaling increased inflation as long-term yields have recently increased.

Fourth, the inflation derivatives market is pricing in a 31% probability that the average inflation rate will exceed 3% over the next five years.ix High and volatile inflation creates uncertainty, thus harming the ability of companies to plan, invest, grow, and engage in longer-term contracts. Moreover, while firms with market power can increase their output prices to mitigate the impact of an inflation, many companies can only partially pass on the increased cost of raw materials, shrinking margins.

U.S. core inflation currently stands at 2.6%.x Due to the uncertain pace of recovery from the pandemic, we are not yet forecasting an inflation environment in the next twelve months.


Theme 3: Higher Interest Rates and a Stronger Dollar Have Weighed On Gold

Gold is considered to be an effective hedge against inflation, but this has not happened in 2021. Following price weakness in the first two months of the year, the gold price extended its decline in March. Gold finished March at US$1,691.1/oz., down over 10% y-t-d, its weakest quarterly performance since Q4 2016, and 18% below the record US$2,067/oz achieved in early August 2020.xi Gold’s performance has been weak across major currencies.

Recent analysis suggests gold’s current performance is consistent with the onset of previous reflationary periods. Analysis indicates that the primary driver of gold’s decline during March, and throughout Q1, was higher interest rates, impacting the opportunity cost of holding gold. While expectations of higher inflation kept building, the continued bond sell-off pushed nominal and real yields on sovereign debt higher during the month – with the 10- year Treasury yield seeing its sharpest rise in thirty years. Gold’s increased sensitivity to interest rates is a headwind in the short term, but the recent increase in interest rates is expected to level off as central banks continue to use monetary policy tools to keep them in check. Some central banks, including the Reserve Bank of Australia and European Central Bank (ECB), have increased bond purchases when local yields increased, while both the Federal Reserve and the Bank of England have signaled a continuation of their current asset-purchasing plans and level of target rates.xii

Despite the intense focus on rising yields during the quarter, the overall level of yields is structurally low. As a result, investors continue to shift their asset allocations from traditional high quality, low yielding bonds to assets which offer higher potential returns, but simultaneously have higher volatility.

Investors will eventually face elevated levels of risk (a driver of gold investment demand) in the short to medium term as markets continue to assess how monetary and fiscal strategies play out. The differing approaches to control higher yields taken by central banks around the world are likely to contribute to heightened risk as well. For example, the rising yield gap between the U.S. and Europe could put further pressure on the ECB and the stuttering economic recovery in the latter.

The reflation trade will also lead to the uneven performance of equities. Recent stimulus measures have flooded capital markets with liquidity, pushing financial asset valuations ever higher. Historically, gold has also underperformed commodities in the early stage of a reflationary period but tended to catch up and outperform in the longer term.

As investors look to guard against these risks, we expect gold will find further support in its role as a portfolio hedge.


Theme 4: U.S. Market Cap Rotation

The announcement of a vaccine for COVID-19 and the implementation of a series of fiscal and monetary stimulus plans to support a recovery in the U.S. economy has resulted in the more domestically focused small- and mid-cap segments of the U.S. equity market outperforming large caps. While this has occurred, the ownership of this space is largely domestic.

Mid- and small-cap U.S. equities represent a significant piece of the global market. The S&P Mid Cap 400 and S&P Small Cap 600 are benchmarks for U.S. mid and small caps. Over the past 20 years, they have outperformed the S&P 500, as well as a majority of actively managed U.S. equity funds in their respective size segment.xiii

The size and liquidity of mid- and small-cap U.S. equities are substantial in the context of global comparisons. At the end of 2020, the S&P Mid Cap 400 had a market capitalization similar to the entire French stock market, while the U.K.’s stock market, the largest in Europe, was roughly the same size as the mid- and small-cap indices combined.xiv

The prior outperformance of mega caps means that now, smaller companies have the potential to act as important diversifiers. The largest U.S. company by market capitalization, Apple, has risen from a 3% weight in the S&P 500 (as of December 2015) to a 6% weight at the end of Q1 2021, larger than the combined weight of 158 smaller constituents. Added to other “Big Tech” titans of Microsoft, Amazon, Alphabet, Facebook, and Tesla, just six companies compose 22.2% of the index, outweighing the 350 smallest names in aggregate.xv

We expect to see relative outperformance in the mid and small market cap sectors as we recover from the pandemic impacted market.



Section 3. Investment Outlook


Global Pandemic Leads Us to a Growth Forecast for the Next Three Months Followed by Nine Months of Stagnation



Frame Global Asset Management considers these trends and factors them into our outlook for the economy in our twelve-month forward period. We look back to periods of similar economic behavior and use this information to predict the future behavior of the asset classes that we consider. Our investment process allows us to adapt for non-traditional monetary policy and other exogenous variables.



Section 4. March 2021 Portfolio Models

The macroeconomic outlook continues to improve, and the recovery may be faster than one that typically follows a business cycle recession, as vaccination rollouts accelerate, and the US$1.9 trillion stimulus package has been signed into law. This has prompted a surge in inflation expectations and commodity prices and a bond sell-off.

At this point in the recovery, households have used lockdown savings to pay down debt – particularly credit cards – while holding onto cash for precautionary reasons, causing demand to be suppressed. Our twelve-month forward outlook remains at three months of Growth, followed by nine months of Stagnation, as we have seen evidence of a stronger short-term recovery rebound but a lingering longer-term impact on employment and output.

Equity exposure across all models reflects our view that markets are looking through the uncertainty of the pandemic and towards the resumption of more normal life once populations are vaccinated. In March, we maintained the asset allocation that we established in February. We continue to include some exposure to gold as a stabilizer in this volatile environment. Shorter duration fixed income has been maintained as the U.S. economy normalizes and inflationary pressures are rising.

The economic reopening and the global stimulus that is underway will lead to improved household liquidity, a wealth effect from rising asset values and lower consumption, healthy consumer balance sheets, and a healing labor market.


Deborah Frame, CFA, MBA

President and Chief Investment Officer

April 14, 2021


iThe Myth of Diversification Reconsidered. MIT Sloan School Working Paper 6257-21. William Kinlaw, Mark Kritzman, Sebastien Page, David Turkington. February 2021.
iiThe Myth of Diversification. The Journal of Portfolio Management. David B. Chua, Mark Kritzman, and Sébastien Page. Fall 2009.
iiiAsymmetric Correlations of Equity Portfolios. Andrew Ang, Columbia University and NBER Joseph Chen, Stanford University. March 2002.
ivThe Myth of Diversification Reconsidered. MIT Sloan School Working Paper 6257-21. William Kinlaw, Mark Kritzman, Sebastien Page, David Turkington. February 2021.
vFrame Global Asset Management. White Paper 2. January 2016.
viG20 Communications. FSB. April 7, 2021.
viiTrading Economics. U.S. M2 Money Supply. February 2021.
viiiThe Best Strategies for Inflationary Times. Henry Neville, Teun Draaisma, Ben Funnell, Campbell R. Harvey, and Otto Van Hemert. April 4, 2021.
ixThe Best Strategies for Inflationary Times. Henry Neville, Teun Draaisma, Ben Funnell, Campbell R. Harvey, and Otto Van Hemert. April 4, 2021.
xTrading Economics. U.S. CPI. March 2021.
xiWorld Gold Council. Gold Market Commentary. April 2021.
xiiWorld Gold Council. Gold Market Commentary. April 2021.
xiiiS&P Dow Jones. Hidden in Plain Sight. Tim Edwards, Sherifa Issifu. April 2021.
xivS&P Dow Jones. Hidden in Plain Sight. Tim Edwards, Sherifa Issifu. April 2021.
xvS&P Dow Jones. Hidden in Plain Sight. Tim Edwards, Sherifa Issifu. April 2021.

Section 1: Q1 2021 Outlook


We Expect an Uneven Recovery and a Prolonged Global Recession

While the world was hoping to see the conclusion of the global pandemic as we entered 2021, instead, we find ourselves more in the middle of the cycle. The pandemic has plunged the global economy into its deepest recession since the Second World War, killing millions and freezing economies across multiple continents. As we enter 2021, there have been over 94 million documented cases of COVID 19 and over 2 million deaths reported globally.i

The impact of weakened fundamental drivers of growth, will steepen the slowdown in labor productivity over the next decade. The pandemic is likely to steepen the long-expected slowdown in potential growth, undermining prospects for labor productivity and poverty reduction. Limiting the spread of the virus, providing relief for vulnerable populations, and overcoming vaccine-related challenges are key immediate priorities.

International bodies, such as the World Health Organization and the Group of Seven, that had been relied upon for a game plan to coordinate a global attack on a global pandemic, proved to be incapable of delivering. Adding to the disaster has been the propensity for the gaps in scientists’ understanding of COVID-19 that have been filled by opportunists.


2020: Teetering Between Recovery and Chaos

From the early months of the pandemic in the spring of 2020, the nature of exponential growth of infections led to a doubling every five or six days. A majority of countries failed to anticipate how they would deal with the spread. Italy’s advanced health-care system collapsed under the burden of cases in March as other countries delayed. Britain went into lockdown two weeks after Italy. During that time infections multiplied between four and eight times. In contrast, Asian countries, such as Taiwan, Singapore, and Vietnam drew on their experience of earlier coronaviruses and acted early and effectively.

Entering April, in response to the global spread, the world underwent a de-globalization as borders closed and travel virtually ceased. And as anticipated, a second wave that was more rampant than the first wave of the virus occurred in the fall. Despite having had months to prepare, governments failed to see the crisis coming for a second time.

Moving forward, the vaccine is a game-changer, allowing restrictions to begin to be lifted. The news of a rollout in record time has brought hope to the situation. The most immediate risk is that the rollout of vaccines is slower than the spread of the virus, held back by bottlenecks in production, or more likely, distribution and administration. As of December 30th, 2.8 million doses of vaccine had been administered in the U.S., a rate at which it will take four full years to vaccinate the entire population. Hopefully this will change as supply chain issues are ironed out and the incoming Biden Administration takes a much more proactive stance. Assuming that there is no virus mutation, by the end of 2021 it is hoped that much of the Western population will have been vaccinated. Western economies can only then begin to return to their long-term trend growth.


Underlying Geopolitical Challenges

2020 saw the deepest global economic setback of the post-war era. Political dysfunction became a way of life in the U.S. and elsewhere. Record joblessness in North America, second and third virus waves, U.S. civil unrest, a near-war with Iran, simmering trade and tech tensions with China, a Russian hack, Brexit uncertainty (again), and an endless U.S. election cycle that then required four days to declare a winner are notable events that followed a profoundly traumatic decade. Underlying challenges were made worse by the economic stress caused by the virus.

• Democracy receded from the heights of the post-Cold War era, retreating in more places than it advanced,
• Brexit and surging populism threatened European integration, one of the defining endeavors of the post-World War II era,
• Globalization encountered fierce political and geopolitical headwinds, as the World Trade Organization become gridlocked,
• China’s economic rise grew more ominous, and
• America became an uncertain advocate of free trade.

COVID-19 is expected to increase global inequality, both within and between countries.

Within countries, the pandemic has hit lower-paid workers particularly hard – the informally employed, women, immigrants, and the low-skilled. Lower-income workers tend to be less able to work from home than higher-income workers and are more likely to be exposed to the pandemic at work and are more vulnerable to job or income losses due to lockdowns.ii The share of lower-paid workers is higher in essential services where workers are more exposed to the pandemic. Social benefits may fail to reach middle income households that have suffered income losses but are outside existing poverty alleviation programs.iii

With regard to inequality between countries, lower-income countries tend to have large informal sectors that concentrate in activities, and operate in facilities, that require close interactions and are particularly vulnerable to pandemic-related disruptions. In addition to causing losses in output levels, the pandemic has set back fundamental drivers of long-term output growth – investment, improvements in education and health, and increases in female labor force participation. Weakening fundamental drivers of growth will be reflected in lower potential growth prospects over the 2020s.


Government Debt and Fiscal Policy Risks

A number of risks related to the pandemic will add to the collateral damage and make the recovery more uneven. These include the rising debt levels in global economies as well as the debt resulting at the corporate level as pandemic related weakness impacts many sectors.

When COVID-19 first began to spread around the world in the spring of 2020, this health emergency risked triggering an economic and financial crisis. America’s financial mechanisms froze as companies scrambled for cash, dumping even their holdings of usually safe Treasuries. Companies and investors the world over rushed into dollars. The bottom fell out of the oil market as demand collapsed. In April the futures price for West Texas Intermediate crude went negative, declining to -$37 per barrel.

As countries locked down, they experienced their deepest downturns in recent memory. But financial panic was averted. The banks stayed resilient. Part of that is a consequence of regulation after the global financial crisis. Fiscal stimulus, government credit guarantees, and central bank action have prevented many losses from occurring. The Federal Reserve stepped into Treasury and corporate-bond markets, a sign of the growing importance of capital markets as a source of credit. The stimulus helped Wall Street, even as Main Street suffered. By August, and again towards the end of the year, the S&P 500 stock market index was hitting record highs. The exuberance was at first concentrated around the sorts of companies, such as those in tech and health care, that did well out of the pandemic. But as news of an effective vaccine broke in early November, it rippled out to emerging markets.

The pandemic has exacerbated the risks to Main Street associated with a decade-long wave of global debt accumulation. Debt levels have reached historic highs, making the global economy particularly vulnerable to financial market stress. There is now almost universal agreement among governments and central banks over the need to maintain fiscal and monetary support until recoveries are entrenched. As a result of sharp output collapses, unprecedented policy stimulus across global economies has led to debt-to-GDP ratios that are set to reach new highs. Global government debt is expected to have reached 99 percent of GDP for the first time on record in 2020.iv

The COVID-19 pandemic is likely to deepen and prolong a slowdown in output, productivity, and investment growth that has been underway for a decade. Weak growth will further increase debt burdens and erode borrowers’ ability to service debt. For some countries in debt distress, the economic outlook may only improve once debt relief via debt write-offs occurs, rather than rescheduling. Pre-emptive debt restructurings have generally been associated with better macroeconomic outcomes rather than restructurings that occur after a default has occurred.v

2020 fiscal easing outstrips 2009 although the amount varies across regions, resulting in divergent growth. Among Emerging Market and Developing Economies (EMDEs), total debt had risen by about 7 percentage points of GDP each year since 2009. In 2020, government debt alone is expected to rise by 9 percentage points of GDP, the most since a series of late 1980s debt crises while corporate indebtedness is also likely to sharply

The pandemic has made this wave of debt more dangerous by increasing its risky features. The sheer magnitude and speed of the debt buildup heightens the risk that not all of it will be used for productive purposes. Previous waves of debt have ended with widespread financial crises. When debt resolution was protracted, growth was often slow to recover or even resulted in a lost decade of growth. There is a risk that this fourth wave of debt since 1970, like its predecessors, also ends with a major financial crisis, with some countries already experiencing debt distress.

Since 1970, about half of all countries that experienced a rapid buildup of debt also experienced a financial crisis. Where debt accumulation episodes were accompanied by crises, output and investment were significantly lower even several years after the end of the episode than in countries without crises.vii

A different but related risk is that ultra-loose monetary policies have led to a misallocation of capital that ultimately threatens the stability of the financial system in one or several major economies. This is possible – history shows how a combination of easy money and liberalized capital markets can cause asset price bubbles to inflate, which can then cause economic and financial market dislocation when they burst. This process typically plays out over years. While it is worth keeping at least one eye on China’s property market, we think that the valuation of major asset classes (including equities) can for now be justified in the context of lower interest rates.


Uneven Economic Recovery in 2021

Although the global economy is emerging from the collapse triggered by COVID-19, the recovery is expected to be slow and global GDP is expected to remain below pre-pandemic levels for all of 2021 and 2022. Recessions that feature financial crises are significantly deeper and longer than recessions that do not.viii Against this backdrop, widespread financial crises, combined with a prolonged pandemic and delayed vaccination, could result in a double-dip global recession, with a further contraction in activity this year.

Throughout the second half of 2020, world trade rebounded strongly. The recovery to date has largely played out in the goods economy much more than in services, as consumers can carry on with purchases from home while other activities requiring face-to-face interactions, such as leisure and travel, are more challenging to resume.

According to the World Bank Global Economic Prospects, published in January 2021, the World Bank projects global economic output to expand 4% in 2021 but remain more than 5% below its pre-pandemic trend. They also project global trade volume growth at 5% in 2021 following a 9.5% contraction in 2020.

Global growth is projected to moderate to 3.8% in 2022, weighed down by the pandemic’s lasting damage to potential growth. In particular, the impact of the pandemic on investment and human capital is expected to erode growth prospects in emerging market and developing economies (EMDEs) and set back key development goals.

In the baseline scenario, global output in 2025 would be about 5% below the pre-pandemic trend and there would be a cumulative output loss during 2020-25 equivalent to 36% of 2019 global GDP.

In addition to causing losses in output levels, the pandemic has set back fundamental drivers of long-term output growth – investment, improvements in education and health, and increases in female labor force participation. Weakening fundamental drivers of growth will be reflected in lower potential growth prospects over the 2020s. The World Bank projects global potential growth would slow by another 0.3 percentage points a year compared with pre pandemic trends, to 1.9% a year over 2020- 29, below the 2.1% a year expected before the pandemic.


Global Prospects



Like human capital accumulation, infrastructure investment raises growth directly by increasing the capital stock and indirectly through its collateral benefits for productivity. Good infrastructure investment can raise productivity by improving competitiveness, lowering production costs, facilitating trade, strengthening human capital, and encouraging innovation and knowledge diffusion. For example, better transportation networks can reduce the cost and time of new construction and installation of new equipment, and improved access to electricity and better sanitation can raise educational attainment and public health standards.

The World Bank Global Economic Prospects Report includes two adverse scenarios; one where new infections remain elevated in much of the world, and a second where vaccination delays re-ignite financial stress that spurs widespread corporate and sovereign defaults. Such outcomes could mean just 1.6% growth this year or even another global contraction.

A more prolific pandemic could lead to even larger income losses. In a downside scenario of persistently higher caseloads and delayed vaccination, global output in 2025 would be about 8% below earlier expectations, and there would be a cumulative loss equivalent to 54% of 2019 global output. Delays in vaccine deployment could disappoint financial markets and trigger a repricing of risks. Amid record-high debt, higher borrowing costs could tip many firms into bankruptcy, weakening bank balance sheets, possibly to an extent that could trigger a financial crisis. In such a severe downside scenario, the report projects that global output could contract by another 0.7% in 2021. Cumulative output losses over 2020-25 could amount to 68% of 2019 output globally.

The International Monetary Fund in October slightly lowered its 2021 growth forecast to 5.2%, warning that despite massive stimulus from central banks and governments the world still faces an uneven recovery until the virus is tamed.


Country Level Outlook

The U.S. economy remains stronger than most other global economies. The fall in U.S. activity in the first half of 2020 was nearly three times as large as the peak decline during the global financial crisis, underscoring the depth of the recession. For 2020, U.S. output is estimated to have fallen by 3.6%. Although the pandemic’s economic impact was not as severe as envisioned in previous projections, last year’s contraction was more than one percentage point larger than that of 2009.

Substantial fiscal support to household incomes – far exceeding similar measures delivered during the global financial crisis – contributed to a robust initial rebound in the third quarter of 2020, which was subsequently cut short by a broad resurgence of the pandemic. The 2021 U.S. growth forecast was cut to 3.5% from 4% in June on subdued demand seen in the early part of the year amid new restrictions and a broad virus resurgence.ix

The near-term outlook for other countries including Canada remains clouded by the resurgence in infections and lockdown measures which are weighing heavily on economic activity. While Canada and the U.S. are expected to cross the finish line of 2020 with gains, the Euro area and U.K. economies are projected to contract given more expansive lockdown measures. Substantial monetary and fiscal policy support will underpin modest growth in all four economies in early 2021 with the momentum building as more people are vaccinated, restrictions ease, and confidence improves.

Other highlights from the World Bank report include:

• Euro area projection reduced to 3.6% from 4.5% following stringent lockdowns, with sectors like tourism likely to remain depressed.
• Latin America estimate raised to 3.7% from 2.8% on prospects for restrictions easing, faster vaccinations in the second half, and rising oil and metal prices.
• Many emerging countries had less fiscal room to offer big handouts and as a consequence may suffer greater economic damage.
• Subdued demand and heightened economic uncertainty, combined with disruptions to schooling and employment, are weighing heavily on labor productivity.



The history of the pandemic has been one of hope over experience, with governments anticipating that lockdowns will be short-lived but then retreating as the virus spreads in ways that we failed to envisage.

Policy support from both central banks and governments will eventually lead to the transition to a sustainable recovery. With weak fiscal positions severely constraining government support measures in many countries, it will be a challenge to recover with sustainable and equitable growth.

The COVID-19 pandemic is a global crisis that necessitates a coordinated global response. Only when the pandemic is effectively managed in all countries will individual countries be safe from resurgence, allowing global growth outcomes to improve materially. We expect emerging markets will continue to outpace advanced economies.

Global cooperation is critical in addressing many of these challenges. The global community needs to make sure the ongoing debt wave does not end with a string of debt crises in EMDEs, as was the case with earlier waves of debt accumulation.



Section 2: Four Themes


Theme 1: China

China is on track for its slowest growth since the Mao era, although set against the gloomy global backdrop, economic performance has been exceptional. Structural weaknesses in China’s economy – demographics, rising debt burdens and diminishing returns on investment – are currently being papered over with stimulus.

Growth in China decelerated to an estimated 2% in 2020 – the slowest pace since 1976. It could have been worse but has been helped by effective control of the pandemic and public investment-led stimulus. Accommodative fiscal and monetary policies led to a sharp increase in the government deficit and total debt. Fiscal policy support, which initially focused on providing relief and boosting public investment, is starting to moderate. The recovery has been uneven as import growth lagged a rebound in exports, contributing to a widening current account surplus.

According to the World Bank Report, growth is forecast to pick up to 7.9% in 2021, above previous projections due to the release of pent-up demand, and to 5.2% in 2022 as deleveraging efforts resume. Even as GDP returns to its pre-pandemic level in 2021, it is still expected to be about 2% below its pre-pandemic projections by 2022.

We remain concerned about China’s rising debt and uneven recovery.


Theme 2: Interest Rates

The pandemic led to a global recession as governments shut down large segments of their economies in an effort to slow the spread of the virus. Unprecedented monetary policy accommodation has calmed financial markets, reduced borrowing costs, and supported credit extension. However, historically low global interest rates may conceal solvency problems that will surface in the next episode of financial stress or capital outflows.

At the onset of the pandemic, short-term interest rates fell as central banks reduced short-term policy rates. The Federal Reserve, for example, reduced the federal funds rate (that is, the interest rate that financial institutions charge each other for overnight loans of their monetary reserves) from 1.6% to near zero over a two-week span in early to mid-March.

Long-term interest rates fell as well, as central banks, including the Federal Reserve, made direct purchases of long-term securities and instituted a number of lending programs aimed at maintaining the functioning of financial markets. Additional downward pressure on long-term interest rates came from investors shifting out of risky assets, such as equities, and into safe assets, such as U.S. Treasury securities. Rates were also held down by the fall in demand for investment as firms postponed and cancelled capital expenditure projects.

The 10-year Treasury yield bottomed in August and is above 1% in the first week of January 2021, for the first time since March last year. This follows the Georgia Senate run-off election and an ensuing rise in the chance that the Biden administration passes further fiscal stimulus. The recent rise in rates has effectively been a tightening but the Fed is unlikely to let monetary conditions continue to tighten, as the economy continues to recover. Yields have edged up in the U.K., but not to the same extent as in the U.S. The recovery in risky assets has continued to push down corporate bond spreads, below their pre-virus levels. The next round of fiscal stimulus is expected to assist the state and local government sector. Munis are attractive as a result and have rallied as Treasuries sold off.

The rise in market rates and steepening yield curve is a big plus for financials, especially for the regional banks which will not face any regulatory risk. There is concern over commercial real estate exposure, but that is really a problem that commercial mortgage-backed securities and structured finance players will confront.

We continue to have concerns that asset prices have been driven up by exceptionally loose monetary policy and that they will reverse once central banks start to raise real interest rates back towards their historical levels. At the same time, the equilibrium level of real interest rates is lower than in the past and this is expected to cushion and correction.


Theme 3: Inflation

In general, the global inflation story has continued to be one of disinflation due to subdued demand outweighing boosts to price pressures from coronavirus-related supply constraints. Deflationary pressures from technology are likely to remain muted. Inflation rates are subdued, as they have been for the past decade, but stimulus and demographic trends could prompt a comeback. Higher public debt burden, slower global labor force growth, and the possibility that globalization will be partly reversed, will lead to a gradual rise in inflation over the longer-term. In the near term, with oil prices around $55 per barrel, base effects will ensure a jump in energy price inflation on the anniversary of last April’s collapse in oil prices.

In the U.S., the pandemic has increased the odds of future inflation, as the Fed is expected to be less committed to ensuring price stability in the future. There is no other central bank as openly committed to policy easing as much as the Fed, and no other central bank boosting the monetary aggregates at the same pace. The Fed has stated that it will not touch rates for three more years even if inflation crosses above 2% and the jobless rate drops below 4%. 3% inflation is something the central bank would be fine with. That would imply a prolonged period of negative real rates, which should be bullish for long-duration assets, bullish for hard assets, and bearish for the dollar.


Theme 4: Commodities

Energy and Gold Prices in 2021

Oil prices partially recovered over the second half of 2020 as production fell sharply. This rebound was more modest than the broader recovery in commodity prices as oil demand disappointed while the rise in other commodity prices was mainly driven by strong demand from China. We expect the demand for oil in 2021 to remain subdued and prices to stay within the current range.

Gold was one of the best performing major assets of 2020 driven by a combination of high risk and low interest rates. Given our more cautious outlook for the speed of the recovery, compared to a crypto currency like bitcoin, the risk that gold could go to zero does not exist as there is a floor in its price, because it has physical properties that make it useful even outside of its primary function as a safe-haven asset. Bitcoin, which has marginal intrinsic value, relies on the faith of its holders that it is worth more than nothing and that the technology is sound. We note that the volatility of bitcoin is five times that of gold.

We do not expect to see a strong rebound in energy prices from here but the environment that we have described may result in strong gold investment demand, which could offset low consumption as it did during 2020. We believe there are strong arguments for holding a portfolio that includes hard assets such as gold, things that will keep their value in the face of the ongoing risks that we have discussed in this Outlook.



Section 3. Investment Outlook


Global Pandemic Leads Us to a Recession Forecast for the Next Twelve Months




Frame Global Asset Management considers these trends and factors them into our outlook for the economy in our twelve-month forward period. We look back to periods of similar economic behavior and use this information to predict the future behavior of the asset classes that we consider. Our investment process allows us to adapt for non-traditional monetary policy and other exogenous variables.



Section 4. December 2020 Portfolio Models

COVID-19 has wreaked havoc on the world economy, which is set to contract the most since WWII this year as governments shut down large segments of their economies to slow the spread of the virus. There are some signs of recovery as the latest data from the CPB Netherlands Bureau for September showed that real world trade in goods was just 1.5% below its December 2019 level. We have maintained our Recession outlook over our forecast horizon of the next 12 months.

In December, we maintained the asset allocation that was established in November for all models. We continue to favor shorter duration fixed income. With interest rates low or negative, we have maintained exposure to gold. Equity exposure across all models reflects our view that markets are looking through the uncertainty of the pandemic and towards the resumption of more normal life once the population is vaccinated.

We are closing in on the end of a year that introduced the current global pandemic, triggering the deepest global economic setback of the post-war era, record joblessness in North America, second and third virus waves, U.S. civil unrest, a near-war with Iran, trade and tech tensions with China, a Russian hack, Brexit uncertainty (again), and an endless U.S. election cycle that then required four days to declare a winner. The pandemic is unfortunately not over as we enter 2021.


Deborah Frame, CFA, MBA

President and Chief Investment Officer

January 14, 2021


iJohns Hopkins University. National Public Health Agencies. January 18, 2021.
iiWorld Bank. 2021. Global Economic Prospects, January 2021. Washington, DC: World Bank. doi: 10.1596/978-1-4648-1612-3. License: Creative Commons Attribution CC BY 3.0 IGO.
iiiWorld Bank. 2021. Global Economic Prospects, January 2021.
ivWorld Bank. 2021. Global Economic Prospects, January 2021.
vWorld Bank. 2021. Global Economic Prospects, January 2021.
viWorld Bank. 2021. Global Economic Prospects, January 2021.
viiWorld Bank. 2021. Global Economic Prospects, January 2021.
viiiWorld Bank. 2021. Global Economic Prospects, January 2021.
ixWorld Bank. 2021. Global Economic Prospects, January 2021.