Investors should diversify to find high-yielding assets that can provide a stable source of income in 2021 as negative interest rates are expected to persist despite improving economic prospects that may come from fiscal stimulus and vaccine availability.

Recent reports indicate that highly effective vaccines against Covid-19 may soon become widely available and lead to a decline in the extreme levels of market volatility that were experienced in 2020. These reduced levels of volatility is, in turn, expected to result in a faster-than-expected return to normal for the global economy in 2021.

However, this comes with a caveat that the negative impact of the pandemic will continue to be felt at least until the first quarter of 2021, although probably to a lesser degree than in the same period in 2020.

In view of such a scenario, there is a consensus among asset managers that assets will be allocated in 2021 based on the following: the ongoing pandemic and its impact on rising government debt levels, central banks’ loose monetary policy with its massive amounts of fiscal stimulus, as well as political developments including the recent US presidential elections.

In terms of specific asset classes, infrastructure is likely to be a major beneficiary of fiscal stimulus measures in the US, Europe, Japan, and China.

In fixed income, emerging market, particularly Chinese, US dollar-denominated sovereign debt is expected to perform better than developed market sovereign debt which is suffering from the low interest rate regime.

“In 2021, we see the economic recovery poised to continue and become more self-sustaining as the latest medical innovations allow for the normalization of private-sector activity. However, with negative real interest rates across advanced economies, –  and it’s likely to stay that way through 2021 and beyond – investors will have to work harder to generate yield,” says Evan Brown, head of multi-asset strategy at UBS Asset Management.

In equities, both developed market and emerging market equities are also expected to benefit in 2021 from the fiscal stimulus that was unleashed by central banks to counter the negative impact of the pandemic.

“We believe that the stimulus measures we have seen since the start of the pandemic, together with the economic recovery, will support financial assets, equities in particular, in the year ahead,” says Michael Strobaek, global chief investment officer at Credit Suisse.

“But there are risks that still need to be monitored carefully. To preserve wealth and meet long-term obligations, investors should invest in well-diversified multi-asset strategies with a significant share of portfolios invested in equities.”

In the first quarter of 2021, two factors are expected to mute the projected spillovers of the Covid-19 shock, according to a report by J.P. Morgan Economic Research.

First is the fact that the lockdowns were concentrated in non-trade services. While inter-regional mobility remains depressed, and cross-border activity is not expected to normalize soon, the adverse impact of the lockdowns will be felt more in the services sector rather than in the trade sector.

“This leaves financial conditions and merchandise trade as prime channels through which negative economic shocks are propagated around the world. However, with vaccine hopes and central bank policies supporting asset prices, and with the latest lockdowns falling heavily on the services sector, the damage to overall growth elsewhere is likely to be limited,” J.P. Morgan says.

Second, global producers will be quick to grab opportunities arising from any perceived improvement in the economic outlook. “Our analysis suggests that Europe’s cumulative mobility decline is sufficient to break the current wave. As a result, lockdowns should be eased in December and allow a rebound in activity during the holiday season, though risks are tilting to a more delayed reopening. Against this backdrop and expectations that the US will contain its outbreak by early January, it is reasonable to think that global producers will perceive a shortfall in sales as transitory and use it as an opportunity to build inventories in response to the vaccine-related bounce to come,” J.P. Morgan says.