House View, January 2021
Surging coronavirus infections has forced lockdown measures on several countries. But mass vaccination campaigns are in the offing, and global manufacturing sentiment remains buoyant.
After a USD900 bn package in December, further fiscal stimulus in the US in early 2021 is possible. Vaccine roll-outs should boost consumer confidence, helping the US to 4.7% GDP growth this year, with risks to the upside.
Renewed pandemic restrictions may mean the euro area economy contracted again in Q4 2020. We see a modest rebound in Q1 2021 before an acceleration in Q2, but our central forecast of 4.3% GDP growth in 2021 is at risk. Fresh lockdowns also challenge our 6.7% forecast for the UK.
Manufacturing sentiment slipped slightly in China in December but remains upbeat. We expect domestic consumption to play a greater role this year, contributing to GDP growth of the order of 9.3%.
There has been no recent variation in our asset-class stance of note since the numerous changes announced at the end of November to reflect a climate that was becoming generally more favourable to risk investment. Global economic recovery should ensure a broadening of the earnings recovery that will be good for cyclical sectors and for innovative small caps that have managed to maintain strong balance sheets.
Economic policies should favour infrastructure and environment-themed assets. Emerging markets should also do well, although country selection remains paramount.
Core developed-market bonds will keep delivering paltry returns, but we are becoming more upbeat on emerging-market corporate debt in hard currency. We continue to prefer to go down the capital structure of quality debt issuers rather than to venture into the riskier parts of high yield.
While oil prices have been recovering, they have trailed the rise in the price of other commodities, notably industrial metals. Plentiful supply capacity could limit further increases in oil prices stemming from favourable vaccine developments. Brent oil could find an equilibrium price at around USD55.
Already the main forex theme in 2020, the decline of the US dollar could continue for a while, whereas the ongoing economic recovery should generally favour the more cyclical currencies over defensive ones. Improving conditions should also support emerging-market (EM) currencies.
As the global recovery gathers steam, market performance should begin less concentrated and equity markets more tilted towards cyclical stocks (Japan and the UK) should do comparatively well. Overall, valuations should logically contract as earnings improve.
A global recovery together with US dollar weakness should act as strong tailwinds for EM equities this year. Wariness about issues in individual countries caused us recently to broaden our exposure to the EM space.
Among our sector convictions are small and mid-cap biotech companies in the health sector, as well as large managed-care companies. Industrial companies linked to the 'green recovery' should also do well, while the skies are brightening for banks.
A simple conclusion to draw from government bond markets in 2020 is that total return performance was strongest in places where yields had most room to fall. This meant that 10-year US Treasuries returned more than their Bund equivalents. Within Europe, Italian bonds also provided richer returns than Bunds. Excess returns were positive for euro credit last year, but negative for US credit.
Economic recovery (and the prospect of more fiscal stimulus in the US) means government bond yields are heading higher, raising the prospect of negative returns. Corporate bonds look comparatively more attractive, potentially providing low positive returns this year.