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Principal Global Insights Outlook 2021

Introduction

2020 was a year like we’ve never seen before.

The coronavirus (COVID-19) pandemic hit hard in March, jolting investors awake from their slumber of high returns and low volatility to a ferocious episode of uncertainty during the first half of the year. Supported by swift monetary and fiscal policy responses from global central banks and governments, the global capital markets bounced back, often in apparent disagreement with a COVID-constrained economy. Looking ahead to 2021, a few developments can pave the way for a potentially more stable year for markets and investors.

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COVID-19 Vaccine:
A welcome end to 2020

A vaccine is a game changer, but the road to it is plagued by a multitude of uncertainties. The encouraging news about several viable COVID-19 vaccines gave markets a much-needed shot in the arm at the tail end of 2020, providing them with some visibility of a return to normality. Vaccine progress will remain a dominant market narrative through 2021, permitting investors to be more tolerant of the intensifying COVID-19 wave and, in the second half of the year, clearing the path to full economic re-openings.

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Will the debt burden us
in 2021?

Federal and corporate debt levels tower over the economy, but shouldn’t hamper risk assets in 2021. The Global Financial Crisis of 2008-09 (GFC) had market participants vowing that more debt was not the solution to solving for sustainable growth. A decade later, however, that is exactly the course we have taken.

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Opportunities in
emerging markets

Invest beyond the U.S. for higher growth potential U.S. risk assets have enjoyed a banner decade, propelled by central bank stimulus, solid economic growth and their heavy weighting in technology. As we emerge out of another crisis (COVID-19), investors need to evaluate if now is the time for the favorable demographics and increased self-sufficiency of emerging market economies to take the lead during the next decade. Will U.S. risk assets continue to rule, or can a case be made for other regions to narrow the gap?

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The 60/40 portfolio is
alive and well

The stalwart strategy holds appeal through 2021. For decades, conventional investing wisdom has suggested that a portfolio composed of approximately 60% equities and 40% fixed income (known as a “60/40 portfolio”) was the best way to achieve a strong overall balance between generating returns and managing risk. Of late, many have tried to argue the opposite, expressing that the 60/40 was no longer a viable solution. In our view, the 60/40 portfolio is alive and well as we head into 2021.

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Global asset allocation
viewpoints

Biased towards risk assets, both cyclical and secular. Heading into 2021, we remain constructive on risk assets. We are overweight equities and underweight risk-reducing alternatives. Within fixed income, specifically sovereigns, we are underweight given a very low return potential.

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Principal Global Asset Allocation Capital Market Expectations

The core investment process of Principal Global Asset Allocation is built on a strategic asset allocation approach that requires generating long-term (10-year) estimates of risk and return across a range of investible asset classes. Capital Market Expectations (CMEs) are these long-term risk and return expectations, factoring in both fundamentals and current market valuations. Updated on a quarterly basis, the CMEs are calculated to reflect our best estimate of where global markets are headed over the long-run, and are an integral part of our investment analysis and portfolio construction process.

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Disclaimers

Principal Global Asset Allocation Capital Market Expectations

The Principal Global Asset Allocation (PGAA) Capital Market Estimates (CMEs) are provided for informational purposes only and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. This paper may contain “forward-looking” information that is not purely historical in nature. Such forward-looking information may include, among other things, projections and forecasts regarding potential future events that may occur (collectively, “Projections”). There is no assurance, guarantee, representation, or warranty being made as to the accuracy of any Projections. Nothing contained herein may be relied upon as a guarantee, promise, forecast, or a representation as to future performance. The opinions and predictions expressed are subject to change without prior notice. The outputs of the assumptions are provided for illustration purposes only and are subject to significant limitations. “Expected” return estimates are subject to uncertainty and error. Expected returns for each asset class can be conditional on economic scenarios; in the event a particular scenario comes to pass, actual returns could be significantly higher or lower than forecasted. Because of the inherent limitations of all models, potential investors should not rely exclusively on the model when making an investment decision. The model cannot account for the impact that economic, market, and other factors may have on the implementation and ongoing management of an actual investment portfolio. Unlike actual portfolio outcomes, the model outcomes do not reflect actual trading, liquidity constraints, fees, expenses, taxes and other factors that could impact future returns. Asset allocation/diversification does not guarantee investment returns & does not eliminate the risk of loss. Investing involves risk.

Risk considerations

Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. Asset allocation and diversification do not ensure a profit or protect against a loss. Equity investments involve greater risk, including higher volatility, than fixed income investments. Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline. International and global investing involves greater risks such as currency fluctuations, political/social instability and differing accounting standards. Commodity futures contracts generally are volatile and not suitable for all investors. Potential investors should be aware of the risks inherent to owning and investing in real estate, including value fluctuations, capital market pricing volatility, liquidity risks, leverage, credit risk, occupancy risk & legal risk.

Important information

Index performance information reflects no deduction for fees, expenses, or taxes. Indices are unmanaged and individuals cannot invest directly in an index. This material covers general information only and does not take account of any investor’s investment objectives or financial situation and should not be construed as specific investment advice, a recommendation, or be relied on in any way as a guarantee, promise, forecast or prediction of future events regarding an investment or the markets in general. The opinions and predictions expressed are subject to change without prior notice. The information presented has been derived from sources believed to be accurate;however, we do not independently verify or guarantee its accuracy or validity.Any reference to a specific investment or security does not constitute are commendation to buy, sell, or hold such investment or security, nor an indication that the investment manager or its affiliates has recommended a specific security for any client account. Subject to any contrary provisions of applicable law, the investment manager and its affiliates, and their officers,directors, employees, agents, disclaim any express or implied warranty of reliability or accuracy and any responsibility arising in any way (including by reason of negligence) for errors or omissions in the information or data provided. This material may contain ‘forward-looking’ information that is not purely historical in nature and may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. This document has been prepared for professional use and is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. Retail customers should seek investment guidance from Investment Advisors before making investment decisions. © 2020 Principal Financial Services, Inc. Principal, Principal and symbol design and Principal Financial Group are registered trademarks and service marks of Principal Financial Services, Inc., a Principal Financial Grou p company. Principal Global Investors is the asset management arm of the Principal Financial Group. Principal Global Asset Allocation is a specialized investment management group within Principal Global Investors.

Ahli United Bank B.S.C.

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IMPORTANT – If you are in any doubt about the contents of this document you should seek independent professional advice. AUB will not act and has not acted as your legal, tax, regulatory accounting or investment advisor or owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on AUB for investment advice or recommendations and/or solicitation of any sort. Remember that all investments carry varying levels of risk and that the value of your investment may go up or down depending on market movements. Investment Products are not considered Deposits and therefore not covered by the Kingdom of Bahrain’s Deposit Protection Scheme. Investors should ensure they understand the risks of investing and read the terms and conditions carefully. If the investor has a complaint about the Bank or any part of the service offered he may in the first instance make a complaint to the Relationship Manager and if he or she fails to resolve the matter then it should be referred to the Customer Complaints Officer contactable at the Bank on +973 17 58 6113 or write to the Customer Complaints Officer or refer to a simple and easy-to-use guide on customer complaints procedures available at Ahli United Bank B.S.C., Building 2495, Road 2832, Al-Seef District 428, PO Box 2424, Manama, Kingdom of Bahrain / www.ahliunited.com/ bh.

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About the authors


Todd Jablonski, CFAChief Investment Officer
Principal Global Asset Allocation


Binay Chandgothia, CFAHead of Asset Allocation – Asia
Principal Global Asset Allocation


Seema Shah Chief Strategist
Principal Global Investors

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