House Views - February 2021 - Stepping out

Macro
As noted last month, the leaders in vaccination programmes – notably the UK and the US – will be best placed to ease lockdown restrictions in due course. For now however, the rapid spread of new mutations and vaccine supply disruptions are pushing governments to tighten and extend restrictions, which will surely weigh on Q1 growth potential. In this context, fiscal policy will remain very expansive. President Biden has already called for a new USD 1.9 trillion support package, while the EU’s recovery fund is due to commence disbursements. China’s 2020 GDP data confirmed the economy registered solid 2.3% growth in 2020 and this year should see a marked acceleration to over 8%.

Central Banks
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 January’s meetings confirmed they plan to keep policy settings very loose. In the US for example, a short-lived move above 2% would not meet the Federal Reserve’s (Fed) new target of averaging 2% over an extended period. Hence, we see no changes in key rates in2021 (and probably none next year) while asset purchase programmes are likely to keep financial markets flooded with liquidity.

Markets
Despite vaccine worries, risk appetite remains high and equity markets have gained ground so far in January. Emerging market equities have outperformed, led by Asia on strong recovery data from China. As we expected, investors are looking beyond near-term problems with vaccines towards the cyclical recovery,which we expect to gather pace in the second half. In addition, we have seen some recovery in “COVID-winners”, in technology, streaming and internet retail for example. Among safe havens, government bonds and gold have given up some gains, as expected, but the dollar has rallied after reaching oversold levels in early January.

Bottom line
We continue to hold a strong Overweight allocation to global equity markets, which we expect to continue to outperform other asset classes. In terms of regions, our preferences remain those markets with greatest sensitivity to a cyclical recovery, most notably emerging markets, Japan and Europe. 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 remainUnderweight 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/JAN/21

Unless otherwise specified, all statistics and figures in this report were taken from the following sources on 27/01/2021: Bloomberg and Datastream.