House View, March 2021
We are raising our full-year GDP forecast for the US this year from 4.7% to 5.6% to take account of recent improvements in data and large fiscal stimulus. We continue to believe the Federal Reserve will remain growth-and market-friendly.
We believe a rebound in consumer spending will help the euro area toward 4.3% GDP growth this year and that the election of Mario Draghi as Italian PM could help the push toward further EU integration.
Despiste some recent softening of credit growth, we expect China’s robust recovery to continue, with GDP growth to reach 9.3% this year, up from 2.3% in 2020.
The Japanese economy surprised on the upside in Q4. We expect Japanese GDP to grow by 2.7% in 2021 after contracting by 4.8% in 2020 but expect no near-term change in the Bank of Japan’s overall monetary stance.
Brent oil prices have recently pushed toward pre-pandemic highs. While favourable momentum could last for a while, the testing of producer discipline, together with abundant capacity and lingering uncertainty over the robustness of demand, mean we believe Brent oil will end the year at around USD55 per barrel.
With economic recovery gathering pace and central banks likely to remain dovish, we believe cyclical currencies could remain more attractive than defensive ones like the yen and Swiss franc – although the huge debt pile built up in the financial system could limit the negative impact of rate differentials on these currencies.
Within a neutral stance on developed-market equities overall, we are overweight the cyclicals-heavy UK and Japanese markets. While growth-style stocks will be challenged to repeat their 2020 outperformance, we like structural growth stocks with solid free cash flows.
In line with our ‘revenge of the losers’ theme, we like global small caps, which we see making an important comeback this year.
In credit, we see a certain convergence between the potential offered by ‘fallen angels’ and ‘rising stars’ (top-rated high-yield issuers reducing leverage that could return to investment grade). We continue to avoid the lower reaches of the high-yield universe, preferring low-duration subordinated debt from investment-grade issuers.
As stocks and bonds become more positively correlated, we have moved to overweight hedge funds and have reverted to a neutral stance on gold.
The Q4 reporting season provided reassuring signals regarding the earnings recovery, with sales and margins trends especially supportive of cyclical sectors. The earnings recovery could add further fuel to the rotation to cyclical/value sectors and away from defensive/growth ones.
Rising market interest rates have been hurting emerging-market equities. Nevertheless, we expect EM stocks, especially value stocks, to remain beneficiaries of the global ‘reflation trade’.
We continue to believe that valuations for Big Tech are generally reasonable in view of big increases in free cash flows. We also believe earnings momentum in the semiconductor sector remains strong for now. While consumer discretionary stocks should be major beneficiaries of economic re-opening, consumer stocks in general are facing higher cost inputs.
With bond yields rising on the back of rising growth and inflation expectations, we have decided to raise our year-end forecast for the 10-year US Treasury yield at end-2021 from 1.3% to 1.7%. We are keeping our year-end forecast for the 10-year Bund at -0.20% unchanged, believing the ECB will be forceful about keeping long-term yields down.
Investors continue to push into the lower tranches of noninvestment-grade credits in the search for yield, with weak issuers raising debt at levels not seen since 2007. At this stage, while there may be few potential positive catalysts left, we see more room for further spread compression in euro high yield than in its US equivalent.