Outlook 2021: Nathan Lacaze (Dimensional Fund Advisors)

Outlook 2021: Nathan Lacaze (Dimensional Fund Advisors)

Outlook
Nathan Lacaze-Dimensional-980x600.jpg

By Nathan Lacaze, Co-CEO and Head of EMEA Portfolio Management at Dimensional Fund Advisors

What is the economic outlook for 2021?

COVID-19 will remain a strong influence on the global economy in 2021 and may lead investors to reconsider their allocation to equity markets. Whatever happens with the economy next year, investors should be aware that stock prices quickly incorporate new information and expectations about the economy, often well in advance of official economic data.

Take the US – the biggest market in the world, where we have almost a century of stock data to analyse. Since the 1930s, there have been 15 recessions. In 11 of those instances, stock returns were positive two years after the recession began, and the average annualised return two years after the onset of these 15 recessions was 7.8%. A $10,000 investment at the peak of the business cycle would, on average after two years, have grown to $11,937.

What are the biggest opportunities and threats for investors?

These data help illustrate the forward-looking nature of markets. Market prices incorporate expectations about myriad factors, including economic conditions and their impact on company cash flows. In fact, research shows that stock prices generally fall in value before a recession even begins.

Therefore, the greatest risk for investors in 2021 is the potential to miss out on what remains the biggest opportunity – the potential market gains enjoyed by disciplined, longterm investors.