House Views - March 2021 - Light on the Horizon

Macro
One year after the first COVID-19 deaths in Europe and the US, new strains of the virus are forcing governments to keep restrictions tight for now. As a result, consumers have chosen to boost savings rather than spend and – although business confidence has recovered in manufacturing – many service businesses continue to struggle. This means that fiscal support programmes – such as President Biden’s USD 1.9 trillion plan – remain indispensable buttresses for developed economies. At the same time, vaccination programmes have accelerated – notably in the UK and the US – which offers hope that lockdowns will be eased by summer, heralding a synchronised cyclical recovery in H2.

Central Banks
Stronger demand from industry, output cuts and bottlenecks in supply chains have pushed many commodity prices to multi-year highs, kindling fears of rising inflation. Indeed, the year-on-year comparisons with last spring’s collapse in oil prices are likely to drive headline prices higher by summer. However, central banks have reiterated that they view these pressures as transitory – in his recent testimony to Congress, Federal Reserve (Fed) chair Jay Powell emphasised that inflation risks remain to the downside. In this context, we believe central banks will ensure that financial conditions remain very accommodative, keeping key rates unchanged and pursuing asset purchase programmes at current rates.

Markets
The impending cyclical upturn, the size of Biden’s fiscal plans and emerging inflationary pressures have combined to push bond yields ever higher since last summer, taking them back to pre-crisis levels. As is often the case – discounting long-term cash flows at higher rates leads to a lower net present value for equities – equity markets have come under pressure recently, particularly highly-valued growth stocks while cyclicals and value stocks have held up better. With bond and equity prices trading lower in late-February, the US dollar has seen some safe haven flows, gaining ground against both advanced and emerging market currencies.

Bottom line
Our confidence in global equity markets remains intact and we continue to hold a strong Overweight position. In terms of regions, our preferences remain those markets with greatest sensitivity to cyclical recovery, most notably emerging markets, Japan and the euro zone. Our sector allocations aim for broad diversification between growth stocks (in technology for example) and undervalued laggards which should benefit from the upturn in the cycle. Within fixed income markets, we are Underweight across the board, with the exception of emerging market bonds. Finally, our view on the US dollar is unchanged –we expect the greenback to shed further ground over 2021. 

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In accordance with the applicable regulation, we inform the reader that this material is qualified as a marketing document. CA25/H1/21 Unless otherwise specified, all statistics and figures in this report were taken from the following sources on 05/03/2021: Bloomberg and Datastream.