Our Top-down view for February/March 2021 on asset classes and the shape of the economy:
Macroeconomy
The most recent concerns about a renewed and faster spread-out of the pandemic means that the global recovery in DM could be if not delayed then slowed down. Yet, while global consensus views on GDP recovery remain unchanged, the downside risks are rising. In this context, GDP 2021 growth estimates of 4.7% for the US, 3.7% for Europe, and 2.7% for Japan are probably not too elevated. The Chinese GDP is expected to grow by around 9%, which is about a realistic objective given that consumer spending and services are progressively taking over from the manufacturing industry which was the past growth driver.
Asset allocation
The enthusiasm about “stay-at-home” and “disruptive companies” was driven by expansive economic policies thereby making brick-and-mortar companies look less like opportunities. While we agree that not all brick-and-mortar companies may reach digital compliance, we note that many of them have strong balance sheets and solid and loyal customer bases. It is therefore possible that the asset rotation towards companies with a cyclical connotation has more room to go, especially for small- and medium-sized companies.
In recent weeks, inflation expectation has started to pick-up. This concern is based on the US where a massive USD 1.9 trillion stimulus bill will hit the market. In Europe, the environment appears to be better, and we would expect Europe to lag the US inflation curve by about 3 to 6 months.
Long-term investors should stay connected to digital opportunities (med tech, contactless payments, advertising, and e-commerce); short-term investors are advised to put their capital through proxy strategies at work or alternatively invest in market neutral strategies playing cyclical trends against each other.
Equities
Equity valuation has reached a new valuation high, reflecting the excellent corporate earnings guidance issued and the hope that the US stimulus package will be released in full. In recent weeks, volatility has picked up which indicates that the level of concern amongst professional investors is elevated.
On the back of a strong demand for semiconductors and other electronic components, EM indices have outperformed in January. We probably will see more recovery in these markets as EM still trades with a discount of 35% when compared with DM.
Re-opening stories: a number of consumer discretionary stocks have anticipated a rapid return to the new normal. We are mindful that the re-opening will be progressive only and that some forecasts may be elusive. Another concern is the impact of rising input prices; inevitably profit margins will be impacted to the negative as we won’t expect that all companies will be able to transfer this to already stretched consumer budgets.
Currencies
Safe-haven buying has stopped, temporarily, the USD downturn. We maintain our negative stance on the USD; for instance, the USD has, versus the euro, a limited yield advantage and the US’s large twin deficits are to rise further and therefore the currency will fundamentally remain in a status of constant overvaluation.