Asset managers are bracing for further fallout from the coronavirus pandemic that is expected to drag the industry down in 2021.

Moody’s issued a “negative” outlook for the industry in its annual outlook report published on December 1, citing a challenging operating environment due to increased market volatility and a shift to more conservative strategies, which will continue to dampen revenue.

This sentiment is echoed by Amundi, which expects portfolio construction in 2021 to be affected by the doubling of volatility, drying up of market liquidity, and increased correlation among mixed assets.

Lower risk appetite is stunting organic growth, while demographic trends in advanced economies are driving asset drawdowns, according to Moody’s.

Pascal Blanque, Amundi’s group chief investment officer, says: “The Covid-19 pandemic drove an unprecedented collapse in economic activity in [the first half of 2020], which was followed by a desynchronized rebound. The recovery phase has been uneven, with the virus cycle dictating the sequence of it. We believe that the damage to the global economy will last well beyond 2021.”

In this scenario, equities will likely have a better risk-return profile than high yield in a phase of mild recovery and earnings re-acceleration in 2021.

“Investors should add exposure to cyclicals stocks, quality value and post-Covid-19 ESG themes. We believe old-fashioned geographical diversification will come back into focus, thanks to global trade no longer driving global growth, the repatriation of value chains and the desynchronization of cycles. At the same time, sector discrimination will become even more evident, providing additional diversification opportunities,” says Blanque.

Amundi recommends that investors should build an income portfolio by searching for opportunities across the board, including emerging market bonds, private debt, loans, real assets (infrastructure, real estate) and high-income equities.

“Opportunities in credit markets remain, but the big theme for 2021 is what we call ‘the great discrimination’. What is sound and expensive will become even more expensive. Some areas of the market will likely deteriorate further, as the abundant liquidity injected by central banks is hiding weakening fundamentals. Selection will be key in 2021,” Blanque says.

According to Moody’s, the areas expected to attract asset flows over the next few years include alternatives, ESG, and outcome-oriented products and services, such as managed retirement accounts.

In 2021, the slowdown in the industry may lead to consolidation since the bigger players, particularly the 10 top firms, account for 35% of the global market.

“In addition, there is also an oversupply of mutual funds. Especially in the US, larger banks and insurance companies will be formidable bidders for asset managers that can increase their own competitive edge,” says Rokhaya Cisse, assistant vice president at Moodys.