Investors with passive holdings in cash are likely to experience flat returns through 2021 and should be looking at more active opportunities within the defensive assets sector, according to a global investments manager.
Schroders head of fixed income and multi-asset Simon Doyle said the impact of low interest rates will continue to be experienced in the year ahead, affecting cash and fixed income assets.
“Low rates have directly and indirectly dragged down yields across the interest rate and credit curves. We can say with a high degree of confidence that returns from cash and fixed income investments, particularly at the lower-risk end of the spectrum, will in absolute terms be lousy in 2021.”
Doyle said it was possible to improve income returns through the use of a broader investment universe and investors should consider using higher-risk defensive assets, which offer better returns than cash and low-yielding sovereign bonds without assuming all the risk of shares.
“In this environment, defensive currencies and options to mitigate downside risks will also be an important part of portfolio management,” he added, noting market volatility may continue during the political transition in the United States and the global COVID-19 vaccine rollout, but also presented good opportunities for active asset allocation approaches.
“Importantly, however, investors need to keep a close eye on inflation. While excess capacity in financial markets and the labour market created through the COVID-19 recession will keep a lid on inflation as the recovery takes hold in 2021, the extent to which policy settings are aimed at generating inflation could increase the risk of inflation rising above recent norms in the medium term.
“This could lead to pressure on bond yields and policy support mechanisms over the medium term, which could threaten the cocktail of support that markets have grown to love and rely on. This would be a catalyst for more structural difficulty for markets.”''