The arrival of coronavirus vaccines means the economy should eventually get out of its sickbed but, faced with risks on both the upside and the downside, the Asset Allocation Committee thinks investors should take things steady.

After a bout of illness, it’s human nature to want to get back into the swing of things. But our sense of recovery often gets the better of our risk management. We head out without a hat and scarf, we swap the flu remedies for coffee, we embrace the stresses of the workplace—and we end up straight back in bed. The arrival of coronavirus vaccines means the economy should eventually get out of its sickbed, but we think investors should take things steady. Short-term stumbling blocks are not confined to the ongoing pandemic: there are underappreciated political and geopolitical risks, too. Even as it gains pace, economic recovery will likely be uneven: hard for many sectors, perhaps impossible for some. And recovery may bring its own risks: stretched valuations in many parts of the market could snap back if interest rates rise faster than expected, and the growing crowd of consensus trades could be a recipe for volatility during the first half of the year. The Asset Allocation Committee (“the AAC” or “the Committee”) has therefore consolidated its positive views on economically sensitive assets, but the “risk on” tenor remains moderate. The first half of 2021 could offer more opportunities to lean into the recovery as it develops.

It is rare to see the level of market consensus that has greeted this new year. Investors appear almost universally to be pricing for an early-cycle mix of low interest rates and ongoing support from both monetary and fiscal policy, combined with the release of pentup demand from consumers and manufacturers. This backdrop is expected to support higher corporate earnings, higher wages, higher consumer prices and higher index levels for risk assets a year from now.

To a large extent, this agrees with the AAC’s latest economic and asset class views for the next 12 months, which consolidate our positive outlook. Where the Committee has changed its views this quarter, it is increasingly prepared to lean into the recovery from the coronavirus crisis. Investment grade credit, with a particular focus on the most interest rate-sensitive sectors, is downgraded; while emerging markets equity is upgraded to an overweight view. That is largely due to the clearing of two big hurdles in November and January: confirmation of successful coronavirus vaccines and more clarity on the post-election landscape in the U.S.

Nonetheless, our current views still express a moderate appetite for risk. While we are not contrarian, we do place more weight on some short- and medium-term uncertainties that could create opportunity to lean into the recovery at more attractive valuations. We would liken our current situation to the end of 2009. A similar nine-month market rally had left investors strongly positioned for a continuation of good news into 2010, and indeed global equities finished 2010 up 9%. On the journey there, however, they traded across a 20-percentage-point range. The S&P 500 Index went on a similar journey, finishing the year with a total return of more than 15% after a second-quarter sell-off that included the notorious “flash crash” of May 6.