House Views - January 2021 - Looking ahead

Macro
Renewed and prolonged restrictions on activity are likely to weigh on Q1 output as governments seek to prevent health system overload. Thereafter, we expect a cyclical recovery in GDP growth led by those countries which best placed to ramp up vaccination programmes, enabling lockdowns to be eased. Furthermore, we expect fiscal policy to remain very expansive – the EU’s recovery fund will begin its disbursements while the Biden presidency should see more focus on stimulus programmes. Thus far, Asia has been able to avoid a second wave of COVID-19 infections and should see solid growth throughout this year, especially if the Biden administration proves less confrontational on trade tariffs.

Central Bank
Headline inflation is likely to spike higher this spring as last year’s collapse in energy prices will distort year-on-year comparisons. However, central banks have given every indication that they view this as a transitory phenomenon and plan to keep policy settings very loose. This means that interest rates will remain on hold and that asset purchases will continue at the current pace for the foreseeable future. At its December meeting, the European Central Bank (ECB) boosted asset purchases and enhanced its support for bank lending. And in the US, unemployment (6.7% in December) is still far from the Federal Reserve’s (Fed) new “maximum employment” target.

Markets
Financial markets tend to look ahead rather than worry about near-term risks, and the rapid start to vaccine deployment has bolstered investors’ risk appetite. This means that safe havens – such as government bonds, the dollar or gold – are less in vogue than more cyclically-sensitive assets like equities. Within global equity markets, we maintain our preference for emerging markets – especially Asia – and laggards like Europe and Japan. The weight of central bank buying of high-quality corporate bonds has pushed the additional yield over sovereign bonds (or “spread”) down to historically low levels and few pockets of value remain in fixed income markets.

Bottom line
Given the supportive macro and liquidity backdrop, equities should continue to outperform other asset classes and we have upgraded allocations to Strong Overweight. In terms of sectors, we maintain a balance between high-quality megacap tech leaders and stocks which should benefit from the cyclical upswing in activity. Investment grade (IG) yield spreads are back at pre-crisis lows and we have moved Underweight. We have also downgraded lower-quality, high yield (HY) bonds – we prefer direct exposure to equities among risky assets. Finally, we have upgraded Brent oil to Neutral as the outlook for demand is likely to continue to improve.

In accordance with the applicable regulation, we inform the reader that this material is qualified as a marketing document. CA159/H2/20

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