Tectonic shifts

The impact of coronavirus on individuals has varied enormously by geography and income group. Many professional, administrative and managerial workers around the world have used digital technology to work remotely – at a time when manual and care workers (or those without digital access) have had to go out to work, balancing worries about disease infection and job insecurity. In many emerging markets, lock-downs may have been shorter, but problems of inequality have been highlighted here too. Figure 1 looks at trends in the Gini coefficient, a measure of inequality, for both emerging markets overall and lower-income developing economies.

Different population groups will also have different experiences over the next few years. But several key themes will run through most people’s experience, long after the worst of the coronavirus pandemic is behind us. We focus below on three results of the crisis.

An increasing presence of the state in people’s lives will be due to several factors. Economic crisis has led to a greater role for the state in unemployment or wage support and this looks likely to be extended in many cases until at least mid-2021. This is unlikely, however, to be able to fully offset structural changes in employment or relative wage levels. Questions around the merits of individual responsibility vs. social security nets will persist and be an important subject for political debate. The pandemic has underlined the importance of the state in healthcare provision (even if provision is usually private). Concerns about disease control and populations’ health are not going to go away: healthcare is one of our key themes, discussed here. Another long-term issue, certain to go well beyond 2021, is the role of technology in delivering state support, e.g. through payments to individuals via central bank digital currencies, which we discuss here.

One underlying issue will be particularly debated in the aftermath of the coronavirus crisis. The crisis has increased the role of the state but has also revealed its shortcomings, in the form of long-term increases in inequality – with more abstract numbers around wealth and income inequality (Figure 2 shows U.S. household wealth inequality) translating during the pandemic into more brutal social divergence in public healthcare access, infection rates and disease outcomes. So we may see renewed discussion around social issues such as universal basic income, even if extended budgetary pressures would normally tend to discourage government largesse. It seems likely that we will see higher taxation on wealthier individuals, partly to help finance the substantial increase in government budget deficits as a result of the pandemic, but also to address these increasing concerns about inequality. Again, as with many other coronavirus- related issues, this was a pre-existing trend that the pandemic has brought into sharper focus. Concerns about inequality are likely to further intensify if the pandemic results in a sustained increase in unemployment for certain income groups, or if governments eventually have to cut back on social support networks due to budgetary constraints.

Individual behaviours have also been changed by the crisis. The move towards on-line shopping has been much discussed: “farewell to the high street” is a long-term trend simply accelerated by the crisis. But changing lifestyles will have much broader implications. But a discussion also needs to be had about what sort of infrastructure (another of our key investment themes) is needed to meet these changed demands. We discuss future real estate trends immediately below, but other aspects need considering too – we may for example see a change in how people move around urban areas, with smart mobility (a key investment theme) under the spotlight. Real estate trends already demonstrate the complexity of coronavirus impacts. The problems of retail sector real estate are well documented. Pre-existing pressures from e-commerce have been amplified by the coronavirus and it is difficult to see how trends here can be fully reversed. For office real estate, many transactions will likely remain on pause for a while: firms may change the way that they use office space and the way that they purchase it. In addition to lower total office space demand in some markets (e.g. those with high financial services exposure), we could see shorter lease terms and other financial innovations. Industrial real estate has seen some growth areas (e-commerce fulfilment centres and healthcare). For residential real estate the outlook is mixed – affordability will depend on economic recovery and employment levels, but long-term drivers remain (e.g. secular changes in household ownership and household growth).

Individuals will start 2021 with hopes of return to the status quo ante – and companies will hope that the scaling down of coronavirus restrictions will lead to a quick recovery in global demand. But, like individuals, companies will not be able to go back to a pre-coronavirus world: they must continue to engage in a process of business reinvention.

Extreme times need extreme policies – and the extension of state support to private sector businesses during the pandemic has gone largely unchallenged. This support has been implicit (e.g. low borrowing costs, labour market support) if not explicit (e.g. equity stakes). But, however it is given, state support has risks. One risk is that, in this era of rapid change, state support ultimately limits the ability of an economy to reinvent itself and ultimately thrive. Firms need to be allowed to prosper or fall back as the economic forest renews itself, as the 19th century English economist Alfred Marshall put it. The Austrian economist Joseph Schumpeter had a blunter turn of phrase: he referred to it as “creative destruction”. State support can hinder this process of renewal, although temporary support is welcome if a firm’s business model is clearly sustainable. Again, this is a problem that goes back way before the policy response to coronavirus but has been reinforced of late. Ever since the global financial crisis (2007 onwards) triggered radical monetary policy, very low interest rates have helped keep many companies afloat. But in many cases this may have encouraged them to take on debt to conceal underlying operational problems (as Figure 3 illustrates for the U.S.). The worry is that the economy will suffer through an increasing number of these no longer competitive firms, with the existence of government equity stakes in some firms or employment commitments potentially making economic restructuring more difficult. Regulatory commitments made as a result of state support may also complicate matters. Investing in firms that do not have a viable “post-COVID” operating model does not seem like a sensible long-term strategy and from a broader economic perspective hinders an efficient allocation of capital.

The pandemic has demonstrated a continued commitment by many governments to environmental, social and governance (ESG) issues and continuing growth in investor interest. This defied initial concerns that a more brutal operating environment would result in the ditching of environmental and social and governance standards as firms desperately tried to reduce costs and survive. This has not happened, with continued strong inflows into ESG-managed assets throughout the year: Morningstar, for example, recently estimated that sustainable fund assets now accounted for 9.3% of total fund assets. We expect the share of ESG investments to continue to grow around the world. Continued growth in interest in ESG investment can be ascribed to four factors.

• 01

  A growing realisation that an unstable operating and living environment may be partly due to failures in environmental management, which can and should be rectified. Growing interest in the dangers around climate change has broadened out into increasing concerns around declining biodiversity and the possible impact of this. An interesting way of translating concerns around extreme climate and other events is provided by Figure 4 which shows the rise in business losses as the result of such events over the past four decades.

• 02

  Demographics means that younger investors’ interest in ESG is translating into higher levels of investment as well as political engagement. (One of our key investment themes is millennials, see here.) Media coverage of, for example, the climate movement is a striking example of their political engagement. But younger demographics are also engaging economically, through their investment as well as consumption choices.

• 03

  An increasing body of ESG legislation and compliance requirements exist not just in Europe but also around the world. By this, we do not mean simply the broad sustainable development goals and other commitments from the United Nations and other global regional bodies. Complementing this, more specific and granular regulation is now requiring firms not only to change their physical operational models (e.g. to reduce pollution), but also their financial models and commitments to meet ESG criteria.

• 04

  Increasing evidence that ESG investment can boost long-term investment returns. More transparent and consistent ESG data and investment classifications will help clarify remaining issues here.

Underpinning this will be an environmental and social component to much of the talk about post- pandemic rebuilding – “build back better” is the phrase used in the U.S. and UK ESG, and some of its components, remains one of our key investment themes for 2021 (see here).

Business has been on the receiving end of changing consumer needs during 2020 with the pandemic initially producing some clear winners for most of the year (e.g. big tech, healthcare, online delivery services) and some losers. Big tech played a key role in holding up equity markets for much of 2020. Figure 5 compares the performance of S&P 500’s ten mega- cap stocks (usually tech-centred) and the index with these stocks excluded.

Towards the end of 2020, vaccine development news led to significant relative equity sector price moves as markets factored in hopes of a faster-than-expected economic reopening and recovery and these preferences are likely to change again during the course of 2021. As sector preferences have been reassessed, one question has been whether tech will continue to play such a dominant role in equity market performance. Some arguments against tech (in an investment context) are founded on a belief that a return to more normal working conditions will reduce demand for tech services, but this seems unlikely – working conditions will not completely reverse, and tech is too deeply embedded in what we do. As we note here, many of our key themes are tech-focused and include specific technology issues such as artificial intelligence and cyber security. At a market level, many tech stocks do also still offer the major benefits of apparently resilient earnings and strong balance sheets.

Market sector preferences started moving towards the end of 2020, and will change again during the course of 2021. But there are still good reasons to like tech over the longer term.

Markets are likely to remain volatile in 2021 as the progress of vaccine rollouts (and the economic damage from coronavirus) continues to be reassessed. Switches in equity sector and style preferences will continue: trends may be fleeting and market optimism could turn to pessimism. (For example, at the time of writing we do not know the length of immunity to infection that the various new vaccines will give: if the immunity is only short-term, or vaccine implementation proves more difficult than expected, then markets may get more pessimistic again about market prospects.) In short, we would suggest taking a balanced style here: "growth"¹ stocks (strong performers for much of 2020 and previous years) are unlikely to be completely displaced by “cyclicals” or “value” stocks as the world economy gets back on its feet. Figure 6 illustrates the price/earnings discount of “value” to “growth” stocks – note that this has been widening for four years, not just during the pandemic. As was shown in late 2020, hopes around the reopening of the economy can benefit “cyclical” stocks, but an outright outperformance in “value” stocks will require higher yields, something that does not appear very likely in the years to come as a result of the crisis – although higher inflation cannot be ruled out.

Ultimately, however, market hopes of sectoral recovery will need to be backed up by a recovery in earnings. For the developed economies, this process could be rather a slog – in Europe, earnings may not be back to 2019 levels before 2023 – but in the interim European Small and Mid Caps may be an effective way to benefit from the reopening of the economy. For many emerging markets, particularly in Asia, stronger economic growth means that the process of earnings recovery could be rather faster, to the advantage of both firms and investors in them. This will add to the case for emerging market equities (and also emerging market corporate bonds). Stronger earnings growth remains essential to return valuations to more normal levels, and progress here will be evident during 2021.

So, from the perspectives of individuals and companies, this will not be a return to a pre-coronavirus. Governments are well aware of this and must manage most medium-term problems around transition and long-term recovery issues. As noted, we think that 4Ds – divergence, digitalisation, demographics and debt – will characterise many aspects of the post-COVID world. These 4Ds will come into even greater prominence when you consider future trends in the “political economy” – i.e. when you broaden out economic considerations to bring in social, political and institutional issues.

The title of our annual outlook last year was “The end of monetary magic?”. Our answer to the question was "no", because we believed that although its efficacy might be fading, it remained a crucial policy tool - particularly if supported by fiscal policy. Faced by an extreme situation resulting from the coronavirus pandemic, policymakers dug even deeper into their monetary magic toolboxes in 2020. This was done not only through keeping rates low and monetary authorities’ balance sheets large, but also through other interventions in financial markets (for example corporate bonds). Despite continued worries about the possibly fading power of each additional increment of monetary policy easing, a replacement has yet to be found (despite a general agreement that complementary approaches, e.g. fiscal policy, structural reforms and so on, need to be developed further). A year ago, it was clear that many of the factors hurting economic performance were non-monetary in nature and thus beyond the scope of monetary policy to address or ameliorate: this remains the case and effort still needs to be put into alternative policy approaches. As we discuss in Result #3, fiscal policy will become important in 2021.

The immediate threats to monetary policy seem containable. Political consensus is still for highly accommodative monetary policy and the consequence will be low yields for even longer, maintaining the hunt for yield. We would not be completely relaxed about inflation, however, and this is a potential threat to monetary policy. The immediate threat from inflation at present appears low, given continued spare capacity and still cautious consumers in many markets (driven in part by continuing fears around unemployment). Our forecasts reflect this. But while much attention has been paid to the “Japanification” story (i.e. low growth, low inflation) this is not necessarily how developments will unfold. Concerns remain about high monetary aggregates for example, and an upward spike in yields cannot be ruled out. Changes in the operating model for services companies (given the difficulties around revenue generation in a still rather socially-distanced environment) may also increase upwards price pressures. There are also broader worries about the possible longer-term implications of deglobalisation or regionalisation on price levels. Other long-term threats to monetary policy remain too. Monetary policy is essentially a blunt instrument and cannot easily deal with issues of divergence within economies or between them (indeed, accommodative monetary policy may make social inequality worse through inflating the value of certain assets). Monetary policy will also run up against structural problems in economies, perhaps caused by demographics (perhaps tending to push up savings, irrespective of accommodative policy) or rapidly escalating levels of debt (see Result #4). Expect discussion on these issues to intensify the longer the unconventional measures remain in place. The remaining “D” – digitalisation – could be both a threat and an opportunity for monetary policy. Further testing (e.g. via regional schemes already in place within China) and rollouts of central bank digital currencies (CBDC) around the world offer the prospect of much more targeted monetary/fiscal policy – for example, through time-limited and spending-directed transfers. This targeting – particularly if it has a time-limited component – may eventually offer a way out of the so-called “liquidity trap”, when low or negative rates reduce the effectiveness of monetary policy through removing the disincentive to hold cash. But continuing uncertainties around the operation of CBDCs must also present risks to monetary policy overall, and the political implications of targeting might also end up eroding the independence of central banks – as some would like.

The immediate threats to monetary policy appear containable, but we should not be completely relaxed about inflation. Divergence, digitalisation, demographics and debt also pose risks to monetary policy – although digitalisation in the form of central bank digital currencies may also create significant opportunities.

Fiscal policy is overtly political in a way that monetary policy has not been in most developed market economies since the 1990s. This politicisation of fiscal policy has a number of implications. First, policy can be subject to a swing in overall sentiment – the general acceptance of massive fiscal stimulus in 2020 on a “needs must” basis may not be sustained for ever, although it is generally much more difficult to screw back the fiscal policy tap than to open it. Second, fiscal policy can get caught up in separate political debates (as did, in late 2020, the fiscal support package in the U.S. and the European Recovery Fund). Third, fiscal policy will have to be seen as directly addressing divergence problems in society, with demographic changes both having an impact on the need for it and also the strength of political voices in play – including those of millennials (a key theme, see here). Healthcare, may remain a priority for fiscal spending but infrastructure (also a key theme, see here) will also demand attention.

However these political debates play out, it is difficult to see a situation where we don’t see some increase in taxation, given the extent of fiscal measures unveiled in 2020 (Figure 8). In particular, the race to the bottom on corporate taxation – evident since the early 1980s (Figure 9) – may now be coming to an end. Finance ministers around the world will be battling a number of competing priorities: fiscal policy will be operating under great pressure and, as noted above, at a time when the composition of the electorates that ultimately control it is also shifting (Figure 10). There will be continued calls for higher taxes on those perceived as being relatively less affected by the crisis (i.e. higher income earners and the wealthy) – in particular as the latter group may be seen as benefiting from loose monetary policy through rising real asset values. It is quite possible that we shall see rises in taxes, not just on corporates but also on wealthier citizens to deal with perceived inequalities as well as finance increased budget deficits.

Expansionary fiscal policy and escalating budget deficits have exacerbated an existing trend – as we have discussed in a previous report (“Peak debt: sustainability and investment implications" published in 2019). Where does this all leave fixed income as an asset class? Rising levels of debt have not so far unsettled the financial markets – there are still willing buyers for government debt – but worries could increase. There will be several reasons for this. Debt taken on in 2020 to deal with coronavirus downturns was in effect replacing lost income – it has not being spent in the hope of stimulating faster growth, as per the Keynesian prescription. And hopes that economies could grow their way out of debt – the usual route – could be stymied by worries about tightening fiscal policies and lack of productivity improvements, until the benefits from tech-related investments (e.g. artificial intelligence and 5G, two of our key themes) start feeding through. It also seems unlikely that inflation will provide much relief. Meanwhile, countries may be facing increasing demographic pressures (as has Japan) increasing debt levels yet further. Eventually markets will get concerned, and the possibility of a spike in government yields during 2021 is a real one, even though the long-term outlook for yields remains lower for even longer, with multiple consequences for all asset classes. Financial repression (i.e. negative real yields) will be a notable consequence.

Escalating fiscal deficits have exacerbated an existing trend for debt levels to increase. Markets currently don't appear that concerned about such borrowing – but don't take this relaxed approach for granted.

Changes to the how individuals and companies operate, and individual governments’ policy responses, will be accompanied by changes to the international environment as, over time, we move towards a new world order. The immediate world economic outlook is to a great extent dependent on how quickly vaccines can be produced and administered. Our assumption is that we will get broad vaccination in the developed markets from Q2 2021 onwards after priority use in Q1. Vaccination should avoid the need for further mass lockdowns, at least after mid-2021. Pent-up demand and high savings rates will boost the economic recovery, although it is likely to be de-correlated between economies, at least initially. GDP growth rates are expected to be positive in 2021 after economic contractions in 2020. Forecasts are given here, but exact numbers here will be less important than the structural changes that underlies them. Two questions will remain particularly relevant. First, how long-lasting will be the COVID-related damage? Second, how will the pandemic affect economies’ relative economic strength? The long-term impact of the pandemic may be less severe than the global financial crisis (GFC) as this crisis was caused by an exogenous shock (the virus) rather than internal economic imbalances. Fiscal and monetary policy also reacted more quickly than during the GFC preventing more and worse “second round” effects, for example through the broad introduction of furlough schemes to preserve employment. Even so, we think that the U.S. will not be back to pre-crisis (Q4 2019) levels of output until the end of 2021 or early 2022 and the Eurozone will have to wait until 2022.

In contrast, the Chinese economy expanded by an estimated 2.2% in 2020 and is forecast to grow by over 8% in 2021. Many other Asian economies have also done relatively well, with the obvious exception of India (estimated to have contracted by -9.5% in 2020, before an expected expansion of 10% in 2021). The rise of Asia (in the modern era) is not a new story – it can be traced back over 40 years, to the start of economic reforms in China in the late 1970s, or perhaps even further. The pandemic, here as elsewhere, has simply accelerated an underlying trend. Chinese growth at a time of U.S. economic setback potentially brings forward the time when China’s GDP exceeds that of the U.S. China has already marked the end of 2020 with the signing of a major Regional Comprehensive Economic Partnership (RCEP) and the formal release of its next five year plan in March 2021 will give it another opportunity to define exactly where it wants to go from here. These long-term relative shifts in regional economic power are nothing new, and in recent decades have been manifest in divergent trends in income growth per capita (Figure 11). But short-term relative changes also have an impact. A faster Asian economic recovery will have an immediate impact on the health of EM corporates, where earnings per share estimates are already close to pre-crisis levels, unlike their developed market peers – as Figure 12 illustrates. This adds to the case for emerging markets equities and bonds in 2021, and also in the longer run the importance of emerging markets cannot be ignored.

By contrast, many developed markets start 2021 with quite a lot to prove. The U.S. election outcome will have multiple implications for economic growth. Some form of fiscal package is likely, and the Senate run-offs in Georgia on January 5 will set out a starting point for the policy agenda (through determining which party controls the Senate). We think that there will be continuing pressure for higher taxes, which the Senate may well accede to, but the Fed policy regime change will help to keep monetary policy accommodative, and the U.S. has a good track record in recovering from crises. In the longer run the flexible and dynamic nature of the U.S. economy will continue to be supportive of its recovery, and while the focus will be on the struggle between China and the U.S. to be the world’s leading global economic power, it is worth also considering possible divergence between major developed markets. The Eurozone’s outlook certainly appears problematic. The European recovery fund should help mitigate to some extent intraregional divergence, once it starts to be implemented in 2021, and shows the potential for European integration. Divergence between and within Eurozone countries will remain a real concern, however, as will (for some of them) levels of debt. The recovery fund is seen as major game changer by many as grants under the scheme would mark a big step from austerity to solidarity. But how the divergence question will be fully addressed in the absence of another external shock remains unclear and the current dissonance between some Eastern European economies and the remaining EU members could be a foretaste of troubles to come. Brexit, now moving toward a possibly disorderly conclusion, shows how disruptive centrifugal forces can be. In the longer run the EU needs to find an answer to this the divergence issue, and to the implications of its underlying demographics of an ageing population (in contrast to the U.S.). Digitalisation may provide some signs of progress, however: we may get a decision on the introduction of a pilot project for a digital EUR in the ECB’s Strategic Review, due to be announced mid-year.

At the start of the coronavirus crisis there was much talk of severe disruption to global supply chains. In the event, disruption was rather less than many had feared and talk of deglobalisation may be overdone. However, more subtle changes have been taking place, with firms rethinking supply chains, often in favour of more local partners. (Brexit may also have prompted some re-evaluation, on a much smaller scale). Global trade growth was already running out of puff before 2020 (Figure 13), and the ratcheting up of U.S./China trade tensions long predates the pandemic. But what is new is the rise of new regional agreements without even a notional U.S. presence.

The November 2020 signing of a regional comprehensive economic partnership (RCEP) between China and 14 other Asian and Australasian countries encapsulates this trend. The RCEP (reached after eight years of negotiation) promises to improve trading ties in the region, mainly through sharp tariff reductions (or removals), although published timelines and data are still sparse. We do not expect any transition to a region-based system (here or elsewhere) to be quick or smooth. Trading partners can fall out over the detail and there will be justified concerns over the dominance of China in RCEP and the region generally – India has been suggesting that firms should follow a “China +1” strategy for suppliers. Digitalisation also opens up new areas for concern in trade or other relationships (e.g. around pharmaceuticals): cyber security is one of our key themes. The need for a well-functioning multilateral global framework also remains. The threat of trade conflicts across (or within) regions remains, and the extension of “buy local” policies, as advocated in the past by President-elect Biden and others, is also a potential concern. Even more importantly, a multilateral approach will remain necessary to deal with the challenges posed by environmental, biodiversity and climate change issues – relevant to our key investment themes on ESG, resource stewardship and the blue economy.

We could also see a change in perceived currency dynamics. Currencies are usually seen as being driven by multiple factors, both short (e.g. interest rate differentials) and long-term (e.g. relative economic growth). Coronavirus changed this perception in 2020. From March onwards, most major currency pairs were driven largely by changes in overall market sentiment. So, for example, when markets went risk-off on heightened coronavirus fears, demand for USD as a safe-haven currency increased and the currency appreciated – despite a faltering U.S. economy and highly accommodative Fed policy. Will a return to a more normal economic environment and more consistently risk-on markets reverse these trends, weakening the USD? We would not expect a dramatic shift. A return to a more normal operating environment may ease the link between overall market sentiment and currency movements and perhaps the most important pair for the USD – vs. the EUR – may end up being driven also by weakness in EUR, if Europe's political problems are not resolved. As a result, our end-2021 forecast for EUR/USD is 1.15 – implying a stronger USD than in December 2020. Other long-term currency trends may be more profound. Watch for example developments in the long-term internationalisation of the CNY, with it perhaps becoming a more important reserve currency in some countries with deep links with China. Digitalisation, in the form of CBDC, could also have an impact on global FX markets in 2021 and beyond. Further details can be found in our report "Central bank digital currencies – Money reinvented" published in 2020.

A rapidly changing external environment strengthens the case for looking at key investment themes, as investors look for indicators of long-term trends.

As Figure 14 shows, our key investment themes can be compared within the three dimensions of technology, demographics and sustaining the world we live in – in short, the TEDS triangle. The 2020 pandemic has re-emphasised the importance of each of these dimensions. Technology plays an ever-increasing role in many sectors and in our lives – from healthcare through to home working. Investors are also increasingly aware of demographics, which seem likely to have a growing impact on both business and government priorities (and thus spending and investment decisions). Meanwhile, growing interest in sustainability is another pre-existing trend accelerated by the crisis. Of the ten key investment in Figure 14, we think that cyber security, 5G, healthcare, millennials, resource stewardship and the blue economy could prove particularly interesting in 2021. Our ten themes can be summarized as follows:

Technology

• Cyber security is a prerequisite in a globalized world – for example to protect critical infrastructure, connected mobility system and digital healthcare system as we respond to pandemic stress. In the new ever more digitalized work environment, cyber security is essential for companies, individuals and governments.
• Smart mobility goes well beyond autonomous driving to bring in traffic management and infrastructure. It is a necessary response both to higher levels of traffic and changing patterns of urban living. As a result, it will have implications not only for car and components industries, but also for energy provision and other sectors.
• Artificial intelligence is the quest to “intelligently” automate repetitive tasks, anticipate human action/preferences, and this approach problem solving in a disciplined manner will create multiple investment opportunities. Artificial intelligence has an impact on multiple sectors, including smart mobility.
• 5G will not only help us work and communicate more effectively, but also “big data” use and boost industrial productivity in many areas – including healthcare, automotive, retail, education, and entertainment industries. Its capabilities will therefore go way beyond the scope of previous network "generations" and expand into new industries and uses.

Demography

• Infrastructure is a key driver of long-term growth as well as a means of more immediate fiscal stimulus as we “build back better”. Infrastructure needs to reflect changing living as well as working patterns and will have an important green component. Infrastructure includes multiple components from roads and railways to electricity grids, water supply or schools and many more. It will shape the world we live in tomorrow.
• Healthcare is a vital component of society, as underlined by the coronavirus crisis. Ageing societies need reliable healthcare systems. Increasing demand and treatment innovation are certain to create multiple investment opportunities.
• Millennials (born in the 1980s and 1990s) have different consumer habits to their elders and have accelerated the move to a digital and sharing economy. With the passage of time, their relative economic and political importance has increased and their investment as well as spending patterns will affect both economic and policy evolution.

Sustaining the world we live in

• ESG (environment, social, governance) investment in general has continued to increase, with growing realization of the challenges we face. Government action has complemented investor interest, with younger generations a driving force.
• Resource stewardship (the management, use and conservation of scarce resources) remains key in a world of rising population and increasing wealth. Rising middle class populations and urbanization create challenges for investment to address. Tighter regulation by authorities and an emphasis on “greening” the waste sector ("recover, recycle, reuse and reduce") is already evident and should lead to greater capital expenditures.
• Blue economy is the effective management of the earth’s aquatic resources and is essential for preserving biodiversity and limiting climate change. Financing models are changing, with technology giving us greater understanding of how it works.

Many of the long-term developments we describe in this report will unfold in 2021 and shape the investment environment for the coming year. Low yields for longer, along with a de-correlated economic recovery (with Asia being first in and first out of the crisis) are among the important drivers of our capital market views summarized below.