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Solving for 2021 Midyear Update
Last November, the heads of our four investment platforms identified the key themes they anticipated would guide investment decisions in 2021. With the year now half over, we revisited these concepts to see how they’ve played out thus far... Read More
Ten for 2021
The heads of our investment platforms identified the key themes they anticipate will guide investment decisions in 2021.
     
Perspectives from Our Investment Leaders
Erik Knutzen on Macro
Brad Tank on Fixed Income
Joe Amato on Equities
Tony Tutrone on Alternatives
     

Macro: The World After the Coronavirus

A Return to Early-Cycle Dynamics—But No Substantial Reflation
A Return to Early-Cycle Dynamics—But No Substantial Reflation
Following many years of late-cycle dynamics, the coronavirus pandemic caused a deep recession that has set a low base from which to rebound. We now face early-cycle dynamics not seen for a decade: above trend-line GDP and corporate earnings growth, declining unemployment and rock-bottom interest rates. In addition, we see limited drivers of substantial inflation before 2022, and, without significant continuing fiscal stimulus, no clear change in the underlying causes of secular stagnation.
 
Populism Is Here to Stay
Populism Is Here to Stay
The end of Donald Trump’s presidency is not the end of political populism or its causes, in our view, in the U.S. or more broadly. This likely means continued political and geopolitical volatility, but perhaps more importantly, it also makes additional fiscal stimulus more likely, as governments pursue borrow-and-spend policies seeking to address the causes of populist discontent. The efficiency and effectiveness of these policies will be key in assessing the likelihood of avoiding secular stagnation.
 
Accelerated Digital Transformation Puts Down Roots
Accelerated Digital Transformation Puts Down Roots
During the coronavirus crisis, many consumers and businesses have fully embraced working, shopping and accessing services from home. The case for digitalization and automation in factories, warehouses, offices, homes and other workplaces has been strengthened. Some of this is likely to spring back once the pandemic eases, but in our view the trends have not only accelerated but permanently transformed many consumer and business practices. During 2021, we will move firmly into the world of 5G connectivity, the Internet of Things and cloud computing.
 
Supply Chains Become Shorter and More Diversified
Supply Chains Become Shorter and More Diversified
Geopolitical uncertainty, economic populism and simple wage and cost convergence have been shortening global supply chains for more than a decade already. The coronavirus pandemic added further impetus to this trend. The ongoing transformation of supply chains can reduce companies’ and industries’ exposure to disruption risk, but at some cost to investors and consumers.
 
     

Fixed Income: Static Yields, Volatile Currencies

Low Yields and Flat Curves Demand Opportunism in Credit Markets
Low Yields and Flat Curves Demand Opportunism in Credit Markets
As with every recession, the 2020 coronavirus recession caused credit spreads to widen. Rapid and substantial central bank intervention made this an exceptionally short-lived phenomenon, however, leaving investors with a highly complex mix of early- and late-cycle characteristics, and default and valuation risks. We think this demands a flexible, “go-anywhere” approach to credit, backed up by the ability to make relative value assessments across fixed income sectors, broad expertise and nimble decision-making.
 
Macroeconomic Dynamics Will Be Expressed Through Currencies
Macroeconomic Dynamics Will Be Expressed Through Currencies
The major central banks have signaled their intention to maintain low interest rates a long way out on the yield curve. With rate volatility suppressed, worldwide growth and inflation differentials are more likely to be expressed through currency markets. Heightened currency volatility and the end of persistent U.S. dollar strength would strengthen the case for dynamic currency hedging.
 
     

Equities: Cyclical Opportunities, Long-Term Themes

Secular Growth Stocks Ultimately Prevail Over Cyclical Rallies
Secular Growth Stocks Ultimately Prevail Over Cyclical Rallies
Early-cycle dynamics will likely favor cyclical stocks as economic growth accelerates, but ultimately, we believe the looming backdrop of secular stagnation—characterized by low rates, low growth and low return outlooks—will lend support to growth stocks and long-duration assets. Nonetheless, if 2020 has taught us anything, it is humility—it remains important to diversify across style factors.
 
A Thematic Approach Can Help to Uncover Long-Term Growth
A Thematic Approach Can Help to Uncover Long-Term Growth
In a low-growth world, a thematic approach can help identify genuine long-term growth opportunities. The coronavirus crisis has accelerated some key themes, especially the digital transformation of the economy, while also showing how these themes transcend regions and sectors. We believe thematic investing is about finding quality companies exposed to secular growth themes: it must be driven by in-depth research, especially when large-cap growth stocks are trading at such stretched valuations.
 
     

Alternatives: Resilience for Growth, Nimbleness for Value

Resilient Growth Will Be in Favor—But It Won’t Come Cheap
Resilient Growth Will Be in Favor—But It Won’t Come Cheap
We have seen the coronavirus crisis accelerate the trend for private equity to favor businesses with resilient growth prospects and executable plans to add value. This translates to favoring sectors such as software, technology and health care. By region, it manifests as a tilt toward growth markets such as China. Valuation is the biggest risk in our view, which will likely need to be mitigated by implementing significant strategic and operational improvements to accelerate earnings growth.
 
A Continuing Role for Opportunistic and Idiosyncratic Strategies, Liquid and Illiquid
A Continuing Role for Opportunistic and Idiosyncratic Strategies, Liquid and Illiquid
Next year will likely bring an unusual mix of early- and late-cycle dynamics, and ongoing pandemic and policy questions. Any resulting volatility or uncertainty is likely to create windows of opportunity for liquid strategies such as equity long/short, distressed and short-term trading strategies, but also for less liquid strategies such as private equity secondaries, opportunistic credit and structured equity. Idiosyncratic and uncorrelated strategies such as insurance-linked securities and macro trading could help lend stability to portfolios during any periods of increased volatility.
 
     
CIO ROUNDTABLE
As 2020 draws to a close, the leaders of our investment platforms gathered to talk about the evolution of the investment environment over the past 12 months and the key themes they anticipate for 2021.


The World After Coronavirus

Erik Knutzen: Last year we were talking about late-cycle dynamics that had already been in place for some years. We saw the potential for recession over the horizon, but we did not see any clear reason for it to appear in 2020. Well, the reason turned up early in the first quarter. The coronavirus pandemic brought global recession forward by perhaps a year or two and was met by a monetary and fiscal policy response that would have been unthinkable 12 months ago. Now, 2021 is likely to exhibit early-cycle dynamics, as we recover from the deep troughs put in place this year: that means above trend-line GDP growth, rising corporate earnings, rising prices, declining unemployment and rock-bottom interest rates. I think we would agree on that basic pattern of facts, and also that the two major modulators of those facts will be the timing of progress on coronavirus and the degree and type of additional stimulus we get.

Let’s start with the stimulus factor. It seems clear that the baton has passed decisively from central banks to governments. This is largely due to the demands of the pandemic, but also because monetary policy is at or near the limits of its effectiveness. But the size of the stimulus is important. We have just emerged from the U.S. elections: what might the results mean for fiscal policy?

Joseph Amato: It’s important to recognize that the Trump phenomenon was not a fluke. The Trump presidential era is over, but would anyone be shocked to see Trump TV capitalizing on the populist movement he tapped into? He still has almost 90 million Twitter followers.

Brad Tank: If he’s not consumed by lawsuits, he could even run for office again in four years’ time. In the meantime, it looks like two Senate elections will go to a run-off early in 2021. The equity markets have priced for a Republican majority, but 50-50 is very different from 51-49.

Amato: Right, and if Republicans in the Senate are not responsive to the issues of inequality that arguably led to the Trump era, if they behave like the traditional conservative elite, they risk being thrown out in two years’ or four years’ time. And while the left wing of the Democratic party has been deflated a little by the closeness of the election, that may not stop it from pushing for a more aggressive tax-and-regulate agenda. In other words, populism is here to stay. The same is likely true in Europe: the pandemic and some steps towards a common fiscal response have taken some of the shine off of populist movements there, but they remain potent and the underlying causes have not melted away. In the U.K., opinion polls indicate some trepidation about Brexit, but it is still going to happen.

Tank: In most cases, populism arises when the masses are dissatisfied with the job the elites are doing, and one of the easiest ways for the elites to ease that pressure is to borrow and spend and redistribute. We have a situation that we haven’t really seen in our working lifetimes: governments are not only willing to spend massively now because of the impact of the virus—we think they’ll be under pressure to maintain that course beyond the pandemic.

Amato: I agree, the persistence of populism and substantial fiscal stimulus will be important for the next several years. But progress on the virus is perhaps more important for the next 12 months. As we anticipated, we’ve had encouraging news from trial data on one mRNA-based vaccine, where effectiveness was reported at the top end of the expected range, and there are others in development. We will learn more about the scalability and distribution challenges over the coming weeks and months. It is not our base-case scenario, but significant logistical delays could threaten another year of intermittent restrictions, stop-start economic growth, business failures and job losses. A lot hangs on this outcome.

“Whatever the vaccine outcome, coronavirus is likely to result in longer-term changes to the way we do things, creating new forces and adding impetus to existing ones.”

– Erik Knutzen



Knutzen: Whatever the outcome, coronavirus is likely to result in longer-term changes to the way we do things, creating new forces and adding impetus to existing ones. Just to pick two examples, we have the remote working phenomenon, and I would also argue that it is amplifying the development of a bipolar economic, trade and technology superstructure, split between the U.S.-led system and the China-led system.

Amato: We are already seeing businesses respond by diversifying their supply chains, many of which had become concentrated in China. Geopolitical uncertainty, economic nationalism and simple wage and cost convergence have been pushing that trend for some years already, but coronavirus added impetus. If your supply chain is deeply embedded in China, you may not necessarily change it, but you are almost certainly re-thinking it, for a number of reasons. That implies having a thorough understanding of your supply chain, which is an important aspect of our environmental, social and governance (ESG) analysis and our engagements with company management.

Then there are the more visible changes accelerated by the pandemic. Digital transformation of business models is coming whether you are in the technology sector or not. A capital goods manufacturer will need increasingly to leverage the Internet of Things to enable machine-to-machine communication; virtually all industry is moving its data to the cloud; retailers will need to embrace ecommerce; and while lockdowns may have represented the peak of the phenomenon, many of us are likely to do more remote working than before the pandemic.

Consumers and businesses are increasingly looking to work, shop and access services remotely. Coronavirus has accelerated these themes, but as they were already in place before, they will likely still be in place five years from now, when hopefully the virus is a bad memory.

Knutzen: All of this raises another big question: Will the real-world application of Modern Monetary Theory and central-bank financing of government deficits, together with the early-cycle dynamics of a post-pandemic recovery, lead to reflationary growth? Or will we settle back into the post-financial crisis pattern of secular stagnation, low rates, low growth, low inflation and low expected returns? If progress on the virus will largely determine outcomes over the next 12 to 18 months, this question is likely to determine them over the longer term.

“Inflation is not an issue for the next six months, but people are likely to be talking about it a lot from the middle of next year.”

– Brad Tank



Tank: Depending on how quickly we come out of the coronavirus pandemic, global economic growth could surprise on the upside. If it does, there is a greater probability of higher inflation. Our thesis is pretty simple: inflation is not an issue for the next six months, but people are likely to be talking about it a lot from the middle of next year.



Fixed Income: Static Yields, Volatile Currencies

Anthony Tutrone: What does that mean when the major central banks are unwilling to let interest rates rise? Volatility will surely arise from fiscal largesse and the resulting inflationary pressures—which could be eased by some of the long-term forces we are describing but compounded by others. It has to show up somewhere. If it’s not allowed to show up in bond markets, is it not likely to be expressed through currencies?

Tank: I completely agree. Will the Federal Reserve go below zero? No, we’re 98% confident that it won’t. But will it deploy yield curve control in the manner of the Bank of Japan? Absolutely, we think that is a real probability. With rates close to or below zero all along yield curves just about everywhere in the developed world, growth and inflation differences worldwide are indeed likely to be manifested in the currency markets.

My team looks at inflation from four different perspectives: supply, demand, structural forces and central bank policy. There are structural forces, such as a globally aging population and increasing automation, that are disinflationary. But the other three are likely to be inflationary for the time being. There is pent-up demand to come, supported by fiscal looseness. Central bank policy is to keep real rates below zero far out along the curve for the foreseeable future. And on the supply side, companies are restructuring themselves and their supply chains to focus on profitability rather than market share—and that means higher prices, all else being equal.

At the same time, we believe the era of persistent U.S. dollar strength is probably over. With higher volatility in currency markets at large, and markets beginning to anticipate relatively higher inflation in the U.S., we think dynamic currency overlays will become a much greater focus of attention.

Knutzen: These forces also make a strong case for gold and precious metals in portfolios, as a potential hedge against the devaluation of fiat currencies.

Tank: This also means that the hunt for yield and depressed spreads will likely be a dominant theme in fixed income for yet another year. The blowout in credit spreads at the height of the coronavirus crisis was very short-lived, particularly compared with the 2008 – 09 financial crisis. Investors will likely continue to look for government bond proxies, from credit markets to income-generating equities, and we would counsel a much more flexible and opportunistic approach to the fullest range of credit markets possible.



Equities: Cyclical Opportunities, Long-Term Themes

Amato: It will be interesting to see these tensions between early- and late-cycle dynamics, and between cyclical recovery and secular stagnation, play out in equity markets. An early-cycle backdrop could prompt investors to question how long secular growth stocks can continue to outperform. On the other hand, rates are low, overall growth is likely to be modest and return expectations are muted. Whether we find ourselves in an environment of post-pandemic recovery or drawn-out pandemic resolution, secular growth stocks, many of which are highly geared to the business transformation themes we’ve identified, will likely remain attractive. There may be cyclical rotations, but we think those are likely to be relatively short-term, tactical opportunities. Nonetheless, if 2020 has taught us anything it is to expect the unexpected and maintain humility. The entire market has been buying mega-cap technology, but it is a good idea to remain diversified and not let portfolios tilt too decisively to one sector or factor.

Tutrone: We see this same tilt toward resilient growth in private markets. It’s about coronavirus, of course, but also much more than that. In many cases the pandemic really just exposed weak business models, whether we are talking about digital readiness, supply-chain diversification, workplace flexibility, operational efficiency and nimbleness, or ensuring there is the right slack in the system to cope with unforeseen circumstances. We see the same resilient-growth tilt in another major theme in private markets, which is more capital moving to Asia, especially China. While the pandemic appears to have originated there, the crisis has shown China to be a very hardy growth engine, and there is huge growth opportunity in China’s private companies. We have seen a host of deals, some involving companies that are near monopolies, growing 50 – 70% a year.

“Identifying key players in China’s 5G value chain, for example, calls for detailed knowledge of both telecommunications and the Chinese equity market.”

– Joe Amato



Amato: I think that raises an important point about how and where investors should seek growth opportunities. If we do face secular stagnation, the premium on growth stocks could tighten, making it increasingly necessary to identify less obvious businesses that are geared to long-term transformational themes. The secular growth mega-caps are a part of that story, but themes such as the advent of 5G connectivity, the Internet of Things, next-generation mobility and the green economy are not only truly global, transcending regional markets, they also support growth deep into value chains. This is where investors and analysts with technical knowledge and experience can find little-known “hidden gems.” This is particularly true when we consider the bifurcation of U.S.- and China-led value chains; identifying key players in China’s 5G value chain, for example, calls for detailed knowledge of both telecommunications and the Chinese equity market.



Alternatives: Resilience for Growth, Nimbleness for Value

Tutrone: When we look at private market deals at the moment, they are almost exclusively in market-leading companies, with resilient businesses that benefit from strong secular tailwinds, which can show readily executable plans to generate value. In 2015, 52% of the co-investment opportunities our team evaluated had projected earnings growth rates of less than 5%. So far in 2020, 100% were projected to grow faster than 5%; and 40% were projected to grow more than 15%. Businesses negatively exposed to the impact of coronavirus don’t seem to be changing hands at all, but we also think this is a conscious, durable shift towards resilient growth. That translates into an outsized proportion of capital going to companies in sectors such as software, health care and technology—which we believe can disproportionately benefit from being held privately, by the way.

As a result, the average valuation of deals has gone up. Resilient growth does not come cheap in a low-growth world. Then again, valuation risk is prevalent across almost all markets, and private equity managers have more tools than most to mitigate that risk, from the ability to make operational improvements that enhance earnings potential to the flexibility to time exits during more favorable conditions.

I think that relates to another theme that we see gathering pace in private markets, which is opportunistic investing—it can offer some of the best ways to find value. Private equity secondaries pricing is at its lowest for a decade. That’s partly due to a surge in General Partner-led transactions. A lot want to get liquidity to investors in their own funds, but many also recognize that some of today’s best opportunities are already in their own portfolios. They are looking to recapitalize companies they own in order to play offense with those that get a tailwind in the post-pandemic environment, or to play defense to get fundamentally good businesses through the crisis. Looking beyond secondaries, should default rates climb, nimble credit strategies will be there to provide capital and liquidity to distressed sellers and fundamentally good private businesses with cash-flow issues.

In addition, private debt strategies could find their opportunity set expanding as banks pull back their lending again, as they did following the 2008 – 09 financial crisis. And our colleagues from Almanac, our entity-level real estate investment team, are telling us that they are getting more inquiries than ever from real estate managers interested in consolidating their businesses into an integrated company. In some cases, these managers have been in the business for decades without an external capital partner, but are now reassessing the benefits of a corporate balance sheet in an environment where access to capital and liquidity is so important.

“In 2015, 52% of the co-investment opportunities our team evaluated had projected earnings growth rates of less than 5%. In 2020, 100% were projected to grow faster than 5%.”

– Tony Tutrone



Knutzen: In the Multi Asset Class team, we think the top-down themes we’ve identified also support certain liquid alternative strategies. If the expected returns from traditional assets look unpromising against this backdrop of secular stagnation, investors are likely to continue to seek out non-traditional strategies. That could cover commodities, specifically industrial metals as a potential hedge against inflation and precious metals as a hedge against fiat currency devaluation, but also uncorrelated strategies such as insurance-linked securities, strategies designed to monetize volatility, and tactical trading.

Tutrone: I agree, uncorrelated strategies still make sense. There may not be the huge dislocations of 2020 to come, but the ability of the Democrats to implement their policy agenda remains unclear, the path of coronavirus remains unclear, the tussle between cyclical recovery and secular stagnation remains unclear. We have seen certain volatility and short-term trading strategies perform well during 2020, and in our view 2021 will continue to generate similar, if smaller, opportunities. The post-pandemic environment is also likely to produce very big winners and very big losers, which ought to be conducive to active management in general and long/short equity in particular. Opportunism is the key, in our view, in liquid markets but also in illiquid or less-liquid markets. Liquid uncorrelated strategies will be useful for trading the cyclical dynamics and volatility. In less liquid markets there could be opportunities to buy into secular themes at attractive valuations due to market dislocations—or just demand for liquidity by various market players.

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Ten for 2021
Private Wealth Management
Our senior investment leaders identified the key themes they anticipate will guide investment and planning decisions in 2021.
     
Perspectives from Our Investment Leaders
Joe Amato on Equities
Sultan Khan on Alternatives
Jamie Iselin on Fixed Income
Joe Amato on Macro
     

Macro: The World After the Coronavirus

Economic Recovery With Low Inflation
Economic Recovery With Low Inflation
The pandemic created a deep recession that has set a low base from which to rebound. We now anticipate a resumption of dynamics that existed prior to the virus-driven shutdowns, with strong growth in GDP and corporate earnings, higher but modest initial inflation and accommodative Federal Reserve policy. While unemployment should continue to decline next year, higher inflation is unlikely until 2022 or beyond, even as the Fed continues along its dovish path.
 
Populism Is Here to Stay… Tax Efficiency and Planning Take Center Stage
Populism Is Here to Stay… Tax Efficiency and Planning Take Center Stage
The election of 2020 does not mark the end of political populism or its causes, in our view. That probably means continued political volatility and additional fiscal stimulus beyond the immediate crisis. This suggests an upward bias in taxation over time, regardless of who is in political control. We believe a key structural “hinge” to moving through the doorway to the 2020s is tax-efficient investing— as well as effective tax planning. Though a divided government may make near-term changes to tax laws less likely, we believe individuals should focus on long-term tax-efficient portfolio strategies and capitalize on currently available planning techniques.
 
Accelerated Digital Transformation Puts Down Roots
Accelerated Digital Transformation Puts Down Roots
During the coronavirus crisis, consumers and businesses have embraced working, shopping and accessing services from home, making the business case for digitalization and automation in factories, warehouses, offices and homes stronger than ever. Some unwinding may take place once the pandemic eases, but in our view the world of 5G connectivity, the Internet of Things and cloud computing is here to stay.
 
Sustainable Investing Gains Momentum
Sustainable Investing Gains Momentum
The pandemic has helped expose glaring inequalities in society, in terms of health care, incomes and employment. As the world emerges from the crisis, we believe that governments, businesses and investors will increasingly seek to mitigate such issues, while redoubling efforts on climate change and corporate governance. More than ever, viewing investments through an Environmental, Social and Governance (ESG) lens will help identify material risks and opportunities, while providing a vehicle, where desired, to effectuate change.
 
Global Trade Wars to Ease, but Tensions Remain With China
Global Trade Wars to Ease, but Tensions Remain With China
Geopolitical uncertainty, economic nationalist populism and simple wage and cost convergence illustrate the pros and cons of our key trading relationships tied to China. As the U.S. shifts gears politically and economically in 2021, we expect one outcome to be the increased diversification and efficiency of supply chains; a variety of our trading partners (including China) stand to benefit. The ongoing transformation of supply chains will reduce companies’ and industries’ exposure to disruption risk, but at some cost to investors and consumers.
 
     

Fixed Income

The Hunt for Yield Continues
The Hunt for Yield Continues
As with every recession, the 2020 coronavirus downturn caused the difference in yields between U.S. Treasuries and other fixed income securities to widen. Rapid and substantial central bank intervention made this an exceptionally short-lived phenomenon, however, leaving investors with a complex mix of growth dynamics, and default and valuation risks. We think this demands a flexible, “go-anywhere” approach to fixed income investing, backed up by the ability to make relative value assessments across sectors, as well as broad expertise and nimble decision-making.
 
Spending and Tax Trends Point to Municipals
Spending and Tax Trends Point to Municipals
Already large government deficits and debt loads have grown substantially, as authorities have sought to insulate industries and workers from economic dislocation. With a consensus favoring more stimulus, and pressure to spend more on health care, climate and the social safety net, we think it’s only a matter of time before tax rates go up to pay for it all—reinforcing the role that creditworthy municipal bonds already play in generating after-tax yield and income.
 
     

Equities

Growth vs. Value: A Rotation on the Horizon
Growth vs. Value: A Rotation on the Horizon
As the economy works through the impact of COVID-19, there will be a cyclical recovery and markets will likely experience a rotation back toward cyclical stocks similar to what we have seen sporadically this quarter on days where there has been particularly good news around vaccines. To date, this trend has not been sustained given the uncertainties associated with the ongoing spread of COVID-19 and the timing of vaccines, but likely will become more meaningful sometime in the coming year. That said, we ultimately believe the outlook for the U.S. economy will be characterized by low interest rates, low growth and low expected returns, which will be supportive of growth stocks. This calls for diversification and a balanced approach to equity style investing.
 
Secular Growth and Thematic Opportunities for the Long Term
Secular Growth and Thematic Opportunities for the Long Term
In a low-growth world, secular growth stocks are likely to command a premium. We think a thematic approach can help to uncover lesser known and more attractively valued “hidden gems.” Investors should recognize that themes such as the digital transformation of the economy transcend regions and also may support growth deep into value chains. Having analysts with specific regional and technical knowledge can help unlock this significant opportunity.
 
     

Alternatives

Uncertainty Paves the Way for Opportunistic, Idiosyncratic Strategies
Uncertainty Paves the Way for Opportunistic, Idiosyncratic Strategies
Next year is likely to present an unusual mix of economic dynamics, with hints of cyclical acceleration against a backdrop of longer-term economy maturity, and ongoing pandemic and policy uncertainty. We believe any resulting volatility should provide a role for opportunistic strategies (for capital appreciation) and idiosyncratic, uncorrelated strategies (to lend stability to portfolios). Meanwhile, private investing opportunities will likely be found in sectors and regions where businesses have resilient growth prospects and executable business plans that add value amid uncertainty.
 
     
ROUNDTABLE
With 2020 drawing to a close, senior members of Private Wealth Management gathered to talk about the current environment, and the key investment and planning themes they anticipate for 2021.
Stephanie Birrell Luedke, CFA
Head of Private Wealth Management
Joseph V. Amato
President and Chief Investment Officer—Equities
James L. Iselin
Head of Municipal Fixed Income
Stephanie Birrell Luedke, CFA, Head of Private Wealth Management

Stephanie Birrell Luedke, CFA, is the Head of Private Wealth Management, a division of Neuberger Berman, dedicated to serving individuals and families by providing comprehensive wealth strategy and investment management advice. In her role, Stephanie oversees all aspects of the client franchises within the firm’s Wealth Management, Private Asset Management and Trust Company businesses. Prior to joining Neuberger Berman in 2019, she was the Global Head of Citi Investment Management for Citi Private Bank for seven years, where she oversaw the global investment teams responsible for developing investment solutions and managing client portfolios across asset classes. Stephanie was previously an Executive Vice President overseeing the Investment Department at Fiduciary Trust Company International, a wholly owned subsidiary of Franklin Templeton.

Stephanie received her BA in Economics and Mathematics from St. Lawrence University. She has been awarded the Chartered Financial Analyst designation and is a member of the CFA Institute. She currently serves as a Trustee for the Cultural Institutions Retirement System, The Conference Board, Ridgefield Academy and St. Lawrence University.

Joseph V. Amato, President and Chief Investment Officer—Equities

Joseph V. Amato serves as President of Neuberger Berman Group LLC and Chief Investment Officer of Equities. He is a member of the firm’s Board of Directors and its Audit Committee. His responsibilities also include overseeing the firm’s Fixed Income business. 

Previously, Joe served as Lehman Brothers’ Global Head of Asset Management and Head of its Neuberger Berman subsidiary, beginning in April 2006.  From 1996 through 2006, Joe held senior level positions within Lehman Brothers’ Capital Markets business, serving as Global Head of Equity Research for the majority of that time.  Joe joined Lehman Brothers in 1994 as Head of High Yield Research.  Prior to joining Lehman Brothers, Joe spent ten years at Kidder Peabody, ultimately as head of High Yield Research. 

He received his BS from Georgetown University and is a member of the University’s Board of Regents and the Business School’s Board of Advisors. He is also Co-Chair of the New York City Board of Advisors of Teach for America, a national non-profit organization focused on public education reform.

James L. Iselin, Head of Municipal Fixed Income
James L. Iselin, Managing Director, joined the firm in 2006. Jamie is the Head of the Municipal Fixed Income Team and a Senior Portfolio Manager. Additionally, he co-manages the Neuberger Berman New York, California and Municipal Fund Inc. closed-end bond funds as well as the Neuberger Berman Municipal Intermediate Bond Fund, the Neuberger Berman Municipal Impact Fund and the Neuberger Berman Municipal High Income Fund. Prior to joining the firm, he was a managing director and senior portfolio manager with Robeco Weiss, Peck & Greer in the Municipal Fixed Income group, where he worked since 1993. Jamie holds a BA in Philosophy from Denison University.
Elizabeth M. Sommer
Chief Fiduciary Officer, Head of Personal Trust, New York
Sultan S. Khan
Senior Investment Strategist
Elizabeth M. Sommer, Chief Fiduciary Officer, Head of Personal Trust, New York
Elizabeth M. Sommer, Senior Vice President, joined the firm in 1999. She is the Chief Fiduciary Officer and Head of Personal Trust for Neuberger Berman Trust Company N.A. Elizabeth has over 30 years of legal experience, specializing in estate planning and federal and state gift, estate and generation-skipping transfer tax planning. Prior to joining the firm, she was counsel at Reboul MacMurray, Hewitt, Maynard & Kristol (now known as Ropes and Gray) managing its Personal Affairs group. Previously, she was an associate at Katten Muchin Rosenman & Colin. Elizabeth’s broad range of experience has included succession planning with closely held businesses; charitable gift planning working with both individuals and institutions, including establishing and counseling private foundations; retirement and qualified benefit planning; planning for non-resident aliens; advising fiduciaries on trust and estate administration issues; purchasing and selling residential real estate; and preparation of matrimonial agreements. Elizabeth has lectured at various institutions on estate planning and tax matters. She is a member of the American Bankers Association Trust Tax Committee. She received her AB magna cum laude, Phi Beta Kappa from Brown University and a JD from New York University School of Law.
Sultan S. Khan, Senior Investment Strategist
Sultan S. Khan, CFA, Senior Vice President, joined the firm in 2016. Sultan is the Co-Head of the Investment Strategy Group (ISG) and is responsible for leading a team of investment strategists focused on advising institutional and high-net-worth clients on customized asset allocation and portfolio implementation decisions. Prior to joining the firm, Sultan was a vice president and investment strategist at Bank of America Merrill Lynch where he was an integral part of the strategy desk which communicated firm views and outlook to its clients. In this role, he provided guidance across a suite of products including equities, ETFs, CEFs and Merrill Lynch’s proprietary portfolios. Previously, he was a senior investment analyst at Receivable Acquisition and Management Corp.(RAMCO), an investment management company specializing in buying distressed loan portfolios. Sultan received his MBA from Georgetown’s McDonough Schoolof Business and his BA in Economics from New York University. Sultan has been awarded the Chartered Financial Analyst designation.


The World After Coronavirus

Stephanie Luedke: 2020 has seen extraordinary turbulence of a nature that would have been unimaginable this time last year. The coronavirus, the collapse of economies and markets, the sharp recovery, recently accelerated virus cases and very encouraging news on the vaccine front—our clients have been through a lot! Over the course of the crisis, we have (somewhat ironically) had more opportunities than ever to be in touch with clients, even if virtually. This is our latest chance to update our views, and to lay out the key themes we expect for next year. Joe, do current circumstances match what we anticipated over the summer?

Joseph Amato: In our Playbook for clients, we laid out three different scenarios tied to the path of the virus, with our base case calling for a U-shaped recovery involving gradual, inconsistent progress against COVID-19 and a return to normal—keyed on the approval of a vaccine this year and wide distribution by mid-2021. The recent spike in the U.S. has been discouraging, but the news from Pfizer and Moderna on their vaccine trials reflects the power of ongoing research efforts; success there and for other vaccines and treatments could tilt the scale toward faster recovery.

It’s important to be cautious in assessing how all this plays out, but at this point we believe that 2021 will see the kind of recovery that is typically associated with the early stage of the economic cycle, which means faster GDP growth, rising corporate earnings, rising prices, declining unemployment and very low interest rates. There are some important variables at play here—one is economic stimulus. At the outset of the pandemic the Federal Reserve and other central banks stepped in with massive monetary support, which remains in place today and which we expect to continue. Fiscal stimulus was also very generous—at first—but since the summer Republicans and Democrats haven’t been willing or able to compromise on an aid package. Whether they come to terms, and how much they agree to spend, could have a major impact on the macro environment.

Luedke: Politics has been a real wild card in 2020. At the start of the year, many thought Donald Trump was a shoo-in for reelection, but by fall they were expecting not only a landslide for Joe Biden but huge gains by the Democrats in the House and Senate. As it turns out, the presidential contest was much tighter than expected, and control of the Senate depends on the outcome of two Georgia runoff elections in January. What does this outcome say to you?

Amato: The Trump phenomenon was not a fluke. Although his presidency is over (lawsuits and recounts aside), the populist sentiment he tapped into remains exceptionally powerful. If the Senate isn’t responsive to the concerns of many Americans, Republicans could see the door in two or four years’ time. And while progressives may be discouraged by the closeness of the election, they aren’t going to stop pushing for higher taxes, income redistribution and regulation.

Practically speaking, populist sentiment is likely to encourage larger stimulus. Rather than face the ire of voters, both parties are going to be willing to spend a great deal to assure that we grow out of this pandemic. Republican Senate control could limit the extent of the package, but it’s very difficult to find any true deficit hawks anymore—on either side of the aisle. Although we don’t believe inflation is a near-term issue, all the government expenditures could conceivably create pressure for higher prices once COVID-19 is really on the decline. Given the lack of inflation for so many years, this could be a significant dynamic that could affect markets and portfolio strategy over the longer term. Moreover, the potential for higher taxes has grown given government spending levels, and will likely reinforce the benefits of tax-efficiency in managing portfolios to maximize the bottom line for investors. This is a key part of our ongoing thought process as we contemplate the future landscape.

Elizabeth Sommer: The trend of populism also has ramifications for planning. For the past few years, we’ve been operating in a highly tax-favorable estate planning environment. However, regardless of who runs the government, there could eventually be higher taxes to help pay for the stimulus and, potentially, greater social spending. Even if no action is taken, many provisions introduced in the 2017 tax legislation will unwind after 2025—including the currently very high federal exemptions from estate, gift and generation-skipping taxes. What this means is that individuals should approach their planning proactively, to capture current advantages and lay the groundwork to deal with potential changes in the future.



Fixed Income: The Hunt for Yield, Taxes Down the Road

Luedke: Given the expectations for persistently low interest rates, the search for yield will continue. Where can investors find income in this environment?

James Iselin: The hunt for yield has been a hot topic for some time, and just when you thought rates couldn’t go lower, they often did. Although the yield advantage of many non-Treasuries widened incredibly fast in March, the differences narrowed rapidly as well, once monetary stimulus kicked in, and tightened more with the recent vaccine news. Today, much of the fixed income market is at or near pre-crisis levels, and as a result you need to be especially vigilant and resourceful to find generous yields that don’t present excessive risk.

Municipal bonds have one key advantage: a federal tax exemption that could become more important should personal tax rates rise in the coming years, something that seems likely given fiscal stimulus and pressures from populist sentiment. Across the municipal universe, the effects of the coronavirus have varied dramatically. For some issuers, revenues have been resilient due to their business mix, population density and combination of revenues, among other factors. In other locations, these issues have stifled finances. So, you have to be cognizant of these differences and the extent to which they are reflected in securities pricing. As a result, security selection is going to matter even more than usual going forward. All told, the general high quality of the municipal universe is reassuring. Although we anticipate increased defaults next year, we think they will largely be confined to more speculative issuances. Even the worst names among the large municipalities are likely to avoid default, even if some do suffer from downgrades.

Moreover, even without tax increases, munis currently offer a significant after-tax yield advantage over equivalent U.S. Treasuries. For retirement accounts or investors with low tax rates, taxable municipals are also appealing. If you are willing to take a bit more credit risk, it may be worth considering better-quality, high-yield munis, which on average currently provide yields of 3 – 4%. With an eventual recovery, credit pressure is likely to ease, which could be a tailwind for municipals with lower ratings.

Luedke: What about beyond the municipal universe? Do you think individual investors can benefit from other types of fixed income exposure?

Iselin: We believe that corporate bonds can still offer opportunity for relative value. On the back of monetary stimulus, many companies refinanced early in the pandemic, which bolstered their finances and extended maturities, reducing risk. This is true for both investment grade and high yield, but the latter has not moved as far in terms of their yield advantage over Treasuries. So, while we believe both are appealing, given current economic trends, we might start to expand exposure where appropriate to high yield.

More broadly, in a climate like today, we think that it can be beneficial to take a flexible approach to fixed income allocations, and seek diversification across types of bonds, geographic locations of issuers, mix of risk and sources of yield. Some investors may be interested in buying and holding fixed income assets to maturity; the concept is to access fixed income returns with good credit quality without realizing too much price volatility due to movements in interest rates. This could be an important consideration over time, given the current low level of rates, and the potential for inflationary pressures in a year or two tied to all the deficit spending and government debt issuance that could be in the works.



Equities: Cyclical Opportunities, Long-Term Themes

Luedke: We’ve seen stunning gains in equities since March, with significant concentration in sectors such as technology and companies that benefited from quarantine measures, and recently some rotation into other sectors with the election and favorable vaccine results. What dynamics could be at play next year?

Amato: You could see tension between the strength of fast growers in the depths of the pandemic and better prospects for more cyclical names in the event of sustained recovery. This is likely the early stage of a new economic cycle, when cyclical companies have often seen share price gains and growth stocks have tended to lag. However, as economic growth settles at more modest levels and as return expectations become more muted, investors may continue to look to growth stocks over cyclical value for opportunities.

To us, one of the key business trends over the next few years is the acceleration of digital technologies—online transactions, the Internet of Things, telehealth, remote work apps—many of which gained momentum during lockdowns. Despite their recent strength, we continue to believe that such stocks will provide valuable capital appreciation potential for investors. It’s also worth noting the key trend of consolidating supply chains, which has been going on for several years but has accelerated with geopolitical tensions and limitations posed by the coronavirus. This will affect companies in various ways and is something our research analysts are keeping a close eye on.



Alternatives: Quality and Opportunistic Potential

Luedke: Given relatively high market volatility and extended valuations in traditional asset classes, many investors look to private investing for differentiated returns. What are the opportunities in private equity given our outlook? And how about private credit?

Sultan Khan: Private equity hasn’t been immune to the pandemic. Valuations there have tended to mimic public markets, but with less volatility given more infrequent reporting. Disruptions to revenues, workforces and supply chains have all taken place, with particular impact on sectors with more exposure to dislocation from the virus. That said, private companies can be more patient and flexible than their public counterparts, and many PE managers have the resources and access to capital to bridge current difficulties.

Beyond that, we think the picture on new transactions is quite reassuring. When you look at the deals being done in private markets, they are almost exclusively in quality companies, with resilient businesses helped by secular tailwinds. This has translated into growth prospects. For example, in 2015, 52% of the co-investment opportunities evaluated by our PE team had projected earnings growth rates of less than 5%, but in 2020, 100% were expected to grow by faster than 5%, out of which 40% were projected to grow more than 15%—twice the cohort of five years ago. In fact, risks are more tied to valuation than to exposure to the pandemic. In terms of opportunities, secondaries (or PE stakes sold on the secondary market) were recently priced at discounts not seen since 2012. Not surprisingly, distressed investments have become more common, while private debt strategies could benefit as banks remain selective on lending activity.



Putting the Pieces Together

Luedke: We’ve just covered an array of ideas that I think will be helpful to investors. Perhaps most importantly, how does this all translate into portfolio positioning and investment opportunities heading into 2021?

Khan: For starters, equity markets have risen sharply since their lows in March, and a simple portfolio that was 60% stocks/40% bonds may be closer to 70%/30% today. It is a good time for investors to assess whether their asset allocation is in line with their long-term objectives and, importantly, their risk tolerance. They should also seek to be well diversified given uncertainties in the markets.

As we have discussed, it is especially important for individual investors to take an after-tax perspective on their investment strategies—something that potentially could be even more critical in the years ahead. This can help clarify choices, whether it means considering the tax efficiency of an equity strategy, capitalizing on tax-advantaged yield, or employing strategies that harvest losses systematically.

We think about portfolios in terms of long-term core strategies complemented by opportunistic investments that may offer additional income, return potential or diversification. Within core equities, we recommend a mix of large- and small-cap stocks, diversified across growth and value, as well as some international exposure. Heading into 2021, we are recommending balanced exposure to growth and value equities, given where we are in the economic cycle, as Joe discussed. There are also opportunities outside the U.S., as investors have tended to be overly U.S.-centric in recent years and with potential for U.S. dollar weakness as the Fed keeps rates at or near zero with its dovish policy framework.

Finally, a number of very interesting opportunities are available in equities that we believe will benefit from business trends such as the digital technologies that Joe mentioned. These can be taken advantage of with opportunistic allocations to thematic equity strategies designed to invest in global companies that are well positioned to benefit from the trends.

We recommend a similar approach with fixed income in terms of complementing core, long-term portfolios with opportunistic investments. We heard from Jamie about the continued attractiveness of municipal fixed income for taxable investors. These portfolios can be accompanied by allocations to corporate bonds, high-yield municipals and fixed maturity portfolios to enhance yield as well as diversification.

Where appropriate, for enhanced return potential, investors may also have long-term exposure to alternatives such as private equity or debt. In this area, we see emerging opportunity sets in co-investments in corporate restructurings, private lending and distressed strategies, and arguably a multiyear opportunity in private equity secondaries.

Luedke: Political expectations have played havoc with estate and wealth planning this year. What steps could make sense through December or into 2021?

Sommer: Although the consensus is that the Republicans will maintain control of the Senate, there are no guarantees; we will have to wait until Georgia’s runoff elections in January to be sure. Nevertheless, the rush to make large tax-advantaged gifts this year has slowed with reduced prospects for a “blue wave” that would have led to an accelerated reduction in existing lifetime exemptions from estate, gift and generation-skipping tax. That said, those who feel comfortable making large gifts to utilize their lifetime exemptions should still consider moving ahead with those transfers, keeping in mind that, regardless of who runs Congress, the federal exemption amounts are scheduled to revert in 2026 to about half of what they are today. There are a variety of ways to make such transfers and, as always, we recommend discussing your goals and the potential approaches with our planning experts.

In terms of year-end 2020, that leaves us with various basic, yet effective, transfer tax planning strategies, including: utilizing your $15,000 (per donor, per recipient) annual exclusion from gift taxes; paying educational and medical expenses to service providers on behalf of anyone in unlimited amounts; and making charitable donations using appreciated public securities, if practicable. If it has been a while, or you have had a change in circumstances, now may also be a good time to review your estate plan—to consider if the named trustees, executors or guardians still make sense, to double-check the beneficiary designations for your retirement accounts and life insurance policies, and to determine if your dispositive scheme still comports with your wishes.

As for next year, we will be watching the regulatory landscape and interest rates closely. Depending on the circumstances, it could make sense to set up vehicles such as Grantor Retained Annuity Trusts or Charitable Lead Annuity Trusts, which tend to provide more potential for wealth transfer when interest rates are low, as they are currently.

We encourage clients to be proactive on these matters, to meet with their advisors to help frame their wealth strategy and estate plans to realize their goals. Investing and planning go hand in hand, and it’s possible to achieve significant tax savings and effective wealth transfer with close coordination and effective investment strategy and execution.

Luedke: As we look ahead, challenges to investors remain, the most significant of which is the course of the pandemic, and uncertainty as to the success and speed to market of the vaccines we have been hearing about. That said, there are reasons for optimism, and we see opportunities for compelling investments in thinking about a post-COVID world in which economies move back to a more normal footing. As we have discussed here today, it is especially important for investors to have well-defined objectives, with portfolio strategies and planning frameworks that seek to achieve them, and to take advantage of the opportunities in a tax-efficient manner. As always, we look forward to working closely with our clients in the coming year and hope that 2021 is a far less “eventful” year than 2020.

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