Markets & Research
Rob Lovelace on the year ahead
Rob Lovelace
Vice Chair and President

Investors who rode out the 2020 market turmoil know the value of standing firm in the face of adversity. A brutal recession and bear market were followed by the fastest rebound in history, with U.S. equity markets hitting new record highs throughout the fourth quarter and into 2021.

Should investors expect more volatility amid the ongoing pandemic this year? What are the key investments themes that may play out? Will U.S. stocks outpace international markets again?

Rob Lovelace, a Capital Group portfolio manager, addresses these questions and more in a wide-ranging Q&A interview:

Q: What’s your outlook for equity markets and the global economy in 2021?

I use a three-part framework that focuses on COVID-19 and the public health issue as separate and distinct from the economy, and separate and distinct from the capital markets. There's obviously some degree of linkage, but people assume there should be a direct cause-and-effect relationship and that’s not necessarily the case.

Starting with the health issue, we’re going through a very difficult time in many countries right now, but we have the hope of the vaccine rollout. So even though I think we'll continue to have flare-ups in different regions, we should be able to deal with them more effectively and they will have a diminishing impact on the economy.

In terms of stock markets, we hit the bottom last spring and are now seeing signs of recovery everywhere. The U.S. and Europe have done relatively well, and emerging markets have been very strong, driven by China, where we are seeing not just a solid economic recovery but sustained growth going forward.

The world is turning the corner toward recovery

The image shows real gross domestic product growth in the United States, the eurozone and emerging markets in 2019, 2020 and 2021. GDP figures for 2020 and 2021 are projections. For the U.S., the GDP numbers are 2.2% in 2019, –4.3% in 2020 and 3.1% in 2021. For the eurozone, the GDP numbers are 1.3% in 2019, –8.3% in 2020 and 5.2% in 2021. For emerging markets, the GDP numbers are 3.7% in 2019, –3.3% in 2020 and 6.0% in 2021. Source: International Monetary Fund, World Economic Outlook, October 2020.

Q: What are the key elements driving stocks higher amid the pandemic?

It’s been a unique market cycle. We had one of the fastest declines in history followed by one of the fastest recoveries in history. There’s never been anything like it before. At the beginning of last year, if we told people what would happen, relative to COVID and relative to the economy, no one would have believed U.S. stocks would be up 18% by the end of the year and nearly every market around the world would be in positive territory.

The reason we're seeing that broad-based strength is because there was a coordinated global effort to support markets and stimulate the economy. A lot of that stimulus has found its way into the capital markets, both stocks and bonds, and that’s a big part of the reason for the recovery we’re seeing now. Low interest rates and massive stimulus efforts — that’s the key framework, and that’s why I feel fairly optimistic going forward, especially from an economic point of view.

The other piece is the great acceleration in many trends that were already in place before the pandemic. We’ve seen years of development and change happen in months — whether that’s new ways of working or the digitization of everyday life.

Q: During the market downturn in 2020, you said we were going through a valley but we could see the other side. Where are we in that journey?

I think we’re definitely at the stage where we are climbing out of the valley. That doesn’t mean it will be a smooth climb. We may still have some strong headwinds, especially on the health issue until more people are vaccinated. But by late 2021, in my view, we’ll be in the midst of a sustained recovery across the board.

The markets may be a slightly different story since they’ve already anticipated the benefits of the vaccine and the recovery. So this is a time to be really selective in terms of individual companies. I expect some volatility, maybe substantial volatility. And there will be some disappointments for sure. But you’ll want to stay invested because, as we are seeing in China right now, we are expecting a period of real sustained economic growth, building on the rewiring of the economy that we’ve seen with the rapid growth of digitally focused companies.

Markets have powered through past viral outbreaks

The image shows previous viral outbreaks from 2001 to 2019, including SARS, Avian flu, Swine flu, MERS, Ebola, Zika and COVID-19, along with an overlay of global equity market performance as represented by the MSCI All Country World Index. Sources: Centers for Disease Control and Prevention, MSCI, RIMES. As of December 31, 2020. Total return index levels are expressed in U.S. dollars and indexed to 100 on December 31, 2000. Disease labels are estimates of when each outbreak was first reported.

Q: Will U.S. stocks continue to outpace non-U.S. stocks as they have for the past decade?

It certainly was an extraordinary decade. The U.S. benefited greatly from a period of incredible technology and health care innovation, and I expect many of those companies to continue doing well. But we are seeing a definite shift toward a more global benefit pattern. There are great companies all over the world capitalizing on these same dynamics.

In fact, there’s a lot more innovation outside the U.S. than you might think. If you look at digital payment volumes, for instance, you can see there's actually more activity outside the U.S. So the same pattern that has driven the U.S. market for the past decade is becoming more global. That’s why it’s so tricky to talk about U.S. versus non-U.S. We don’t think about it that way because it’s a global framework. We search for the best companies in the world, no matter where they are based.

Think all innovation is in the U.S.?  Think again

The image shows the rapid growth of global digital payments revenue in billions of U.S. dollars from 2016 to 2023 (estimated). The Asia-Pacific region leads, followed by Europe, North America and the rest of the world. Source: World Payments Report 2020 from Capgemini. 2020 to 2023 are estimates. Figures reflect all non-cash payments. No third party whose information is referenced in this report under credit to it, assumes any liability towards the user with respect to its information.

Q: What investment themes do you see playing out this year?

I’m focusing on pent-up demand. I think that's going to be a big theme offering a lot of compelling short-term opportunities — one of which is luxury goods. We’re seeing solid demand for Louis Vuitton bags and other luxury items right now. A lot of that demand is coming from China because, as I mentioned earlier, the Chinese economy has already recovered.

But there's also something else going on that we hear about when we talk to the distillers and the beverage companies. When given a choice, people are buying top-shelf liquor. I think the sentiment is, “We’re all going through this very tough period, so if I’m going to buy whiskey it’s going to be the best whiskey.” We’re seeing a lot of consumer-facing companies with surprisingly strong demand. And, of course, just about anything that touches the digital world is doing well. So those are a couple of themes that I think will remain relevant for investors this year and beyond.

Chinese consumers increasingly dominate spending on personal luxury goods

lux china

Q: Let’s take a look at the long-term picture. How will life be different in 2030?

That’s not a hypothetical question for me. In the portfolios that I manage, my average holding period is about eight years, so I’m living that approach to investing. Clearly some things have fundamentally changed. We will have hybrid work and meeting structures, which in some ways are better than having everyone fly in for a big conference. There will be a lot more digital interaction.

But I think we've also come to appreciate that human contact matters. We want to see each other in person so we can brainstorm and build off each other's thinking. So I think we'll see a world in which business travel comes back and we'll have a lot of interaction again, but I think it's going to be more intentional and thought out than in the past.

We’re all much more comfortable now in a digital world. Countries like India are getting rid of physical currency — they're adopting digital payments, and there will be less resistance to it because we’ve all become used to a world where paying in cash isn’t necessarily the best way to go. There’s just a different mentality today.

We may also see a shift from larger cities in North America and Europe toward smaller cities due to the expansion of digital connectivity. We're looking at those shifts and thinking about how they're going to impact our portfolios. I think the ubiquity of high-speed connectivity will be a game changer over the next 10 years. 

Q: What parting thoughts do you have for investors as we head into a new decade? 

Stay focused on the long term, stay invested and stay open to global opportunities. The U.S. is very well positioned as an economy. We have a lot of great companies here. But if you've done nothing over the last few years because U.S. stocks have been compounding at roughly 15% and the rest of the world at 7% or less, you probably have a lot more of your assets invested in the U.S. than you do elsewhere around the world.

Even if you're investing in multinational companies, you may have a lot more exposure here than you wanted when you originally set up a diversified portfolio. So look at global opportunities as much as you can, find the best companies wherever they happen to be based and make sure you have good investment partners that are able to swiftly adapt to a changing environment.

Not all the best stocks are in the U.S.

The image shows that most of the best-returning stocks are domiciled outside the United States. Overall, 75% of the top stocks since 2011 have been based outside the U.S. The image shows the number of top 50 stocks each year from 2011 to 2020 year-to-date by company location: Emerging markets (ex China), China, developed international and United States. The index returns for U.S. and non-U.S. in 2011 are 2.1% and –13.7% respectively; 16% U.S. and 16.8% non-U.S. for the year 2012; 32.4% U.S. and 15.3% non-U.S. for the year 2013; 13.7% U.S. and –3.9% non-U.S. for the year 2014; 1.4% U.S. and –5.7% non-U.S. for the year 2015; 12% U.S. and 4.5% non-U.S. for the year 2016; 21.8% U.S. and 27.2% non-U.S. for the year 2017; –4.4% U.S. and –14.2% non-U.S. for the year 2018; 31.5% U.S. and 21.5% non-U.S. for the year 2019; 18.4% U.S. and 10.7% for 2020. Sources: MSCI, RIMES. 2020 data as of December 31, 2020. Returns in U.S. dollars. Top 50 stocks are the companies with the highest total return in the MSCI ACWI each year. Returns table uses S&P 500 and MSCI ACWI ex USA indexes for U.S. and non-U.S., respectively.

Rob Lovelace is vice chair and president of The Capital Group Companies, Inc., chief executive officer of Capital Research and Management Company, and an equity portfolio manager. Rob has 35 years of investment experience (as of 12/31/2020), all with Capital Group. Earlier in his career, Rob covered global mining & metals companies as an equity investment analyst. He holds a bachelor’s degree in mineral economics (geology) from Princeton University. He also holds the Chartered Financial Analyst® designation. 

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