House Views - May 2021 - Up?

Macro
Many recent business confidence surveys have reached multi-year highs – the US Institute of Supply Management’s manufacturing index reached the highest level since 1983 in March – as rapid progress in vaccinations has bolstered confidence in cyclical recovery. Moreover, year-on-year growth figures in the second quarter will show an extremely strong rebound from 2020’s recession low. Liquidity is abundant and fiscal spending is being ramped up – President Biden recently launched a $1.8 trillion (tn) programme to invest in education and families, taking total plans since December for new spending over the next few years to 36.5% of GDP. Despite the recent spike in coronavirus infections to new highs driven by India, we continue to expect a synchronised global recovery by year end.

Central Banks
Abundant liquidity, lavish fiscal spending and skyrocketing commodity prices have sparked a turn upwards in inflation expectations, leading many investors to fret about imminent tightening in monetary policy. Although the Bank of Canada recently started to reduce the pace of asset purchases (“taper”), we do not expect the Federal Reserve (Fed) or the European Central Bank (ECB) to follow suit for now. Indeed, the ECB recently announced a “significantly higher” pace in asset purchases over Q2 and the Fed still does not plan to raise rates before end 2023. Moreover, neither expects this year’s spike in inflation to last. All in all, monetary policy is likely to remain extremely supportive for many quarters to come.

Markets
The macro environment should continue to foster risk appetite among investors. Cyclical recoveries tend to favour stock markets and inflows to equity funds worldwide have been robust – Bank of America calculates that subscriptions over the past five months have been higher than the aggregate over the preceding twelve years. Even if the spike in inflation does prove transitory, ultra-low bond yields do not look sustainable and we expect them to resume their rise, pushing bond prices lower. The difference in yield between corporate bonds and sovereigns (known as the “spread”) remains narrow, offering little value for investors. We remain bullish on the euro against the US dollar – growth differentials should favour the single currency in the second half.

Bottom line
We have made no changes to our asset allocation this month. The environment continues to favour equities and we remain Overweight, with a focus on those markets – such as Europe and Japan – which should benefit most from cyclical recovery. We also continue to recommend a blend of “Value” – stocks which rank as cheap on ratios such as price-to-book-value, dividend yield and price-to-earnings – and fast-expanding “Growth” sectors in portfolios. We remain Underweight on bond markets – especially advanced economy sovereign bonds – while highlighting the attraction of some emerging market issuers, for example China. Among diversification tools, we are Neutral on both gold and hedge funds.

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 29/04/2021: Bloomberg and Datastream

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