What does 2021 hold for the big US banks?

Nearly two-thirds of strategists polled by Reuters believe US earnings will return to pre-COVID-19 levels during 2021, as long as the white knight of a vaccine gallops into view.

The big investment banks appear to be optimistic too. “The recovery is intact and the world likely re-opens [in the second half of 2021],” strategists at Bank of America [BAC] said. “But a lot of optimism is priced in already on vaccine/recovery. Vaccine execution risk, delayed fiscal stimulus and longer lockdowns are risks.”

"But a lot of optimism is priced in already on vaccine/recovery. Vaccine execution risk, delayed fiscal stimulus and longer lockdowns are risks" - Bank of America strategists

The firm joins JPMorgan Chase [JPM], Goldman Sachs [GS] and others in forecasting a positive outcome for equities. Indeed, even Morgan Stanley [MS] encouraged investors to “keep the faith” and “trust the recovery” in an outlook for next year.  

Chetan Ahya, chief economist and global head of economics at Morgan Stanley, forecasts global growth of 6.4% in 2021, which is a full percentage point higher than consensus because he believes the reaction of the economy to the virus is changing.

Ahya also expects the global recovery to be in sync with the developed world, but suggests the emerging world will grow as investors look to take on more risk towards spending.

“I think we're still looking at a pretty healthy liquidity environment for next year where central banks are still providing support for markets and I do think investors have a lot of cash that they've built up, given all the uncertainty that things have been facing and that cash can come back into the markets,” Ahya explained.

But if we are to see a V–shaped recovery, where do the big investment bank strategists see the best investment opportunities?

Goldman Sachs’ top healthcare play

With a swathe of COVID-19 vaccines lining up for regulatory approval, it’s no surprise that pharmaceutical stocks are tipped as the big winners of 2021.

Goldman Sachs is particularly keen on stocks that have invested most in their future business development compared with their current operating cash flow, according to Financial News. Economists at the firm pointed to headwinds such as a vaccine and the potential for US fiscal stimulus to support its basket of such companies.

The top-ranked among Goldman Sachs’ basket is pharmaceutical giant Incyte [INCY]. According to the publication, analysts at Goldman Sachs peg the company’s growth investment to cash flow ratio at 767% over the next three years.

Wells Fargo expects continued strength in tech stocks

For Wells Fargo [WFC], the stay-at-home investing trend will likely remain a major theme in the year ahead. Strategists at the firm expect tech stocks, such as those in the ecommerce, streaming media and entertainment sectors, to remain in high demand as customers adapt to a more permanent online shift. 

“Our preference remains in those sectors and what used to be considered straight IT, the ‘old’ tech companies,” Paul Christopher, head of global market strategy at Wells Fargo, said in a note to clients. “The coronavirus has sped up the move to digital technologies. It all points toward increasing and accelerating demand for more technology and tools.”

"The coronavirus has sped up the move to digital technologies. It all points toward increasing and accelerating demand for more technology and tools" - Paul Christopher, Wells Fargo

Bank of America bets on a value rotation

Growth stocks, most notably mega-cap tech firms, led the market’s recovery through the second half of 2020, but the banks agree a steady economic recovery will turn investors’ attention to value stocks.

“Value is the new growth sector,” Savita Subramanian, head of US equity and quantitative research at Bank of America, said in a 2021 outlook note. “Value is a theme that hasn't worked for quite some time because we've been in an environment of weak economic growth and very low interest rates and we haven't necessarily seen a full-fledged economic cycle.”

Bank of America has an Overweight rating for financials, energy, tech and healthcare, with Subramanian calling the first two “unapologetically cyclical and value-focused”.

Morgan Stanley backs financials

The financial sector also has the backing of Morgan Stanley.

“Better global growth and rising inflation, we think, will lead to steeper yield curves,” Ahya said during the firm’s market outlook. “And financials should get a benefit from that as well as just generally an uplift from a better economic environment and thus lower loan losses.”

"Better global growth and rising inflation, we think, will lead to steeper yield curves" - Chetan Ahya, Morgan Stanley

The chief economist based his forecast on the fact that financials, historically, have been beneficiaries of higher inflation environments. Ahya also notes that the sector trades at a reasonable valuation relative to the market, which should signal some upside.

Citigroup maintains bullish call on gold 

Despite the rosy economic outlook, safe haven assets like gold are expected to continue on a bullish cycle, believe analysts at Citigroup [C].   

It was no surprise when the precious metal hit an all-time-high of $2,074.88 per ounce in August, or that it fell once news of a vaccine gathered pace. That said, Aakash Doshi, head of commodities research at Citigroup, stated he believed it was “inevitable” that prices would break $2,000 again in 2021.

He believes that the current environment, which has seen global central banks cut rates to a point where the bond market has $17trn in debt and is negative yielding, is positive because gold is a non-yielding asset with no credit risk.

“Over the next few years, we think we’re setting up in an environment where gold prices will test the all-time highs and I think that’s likely towards the end of 2020, 2021, as global growth slows down, as central banks keep policy easy and you have a situation where the market might be looking at currency devaluation down the line,” Doshi said in a note.