Our outlook

Weekly View - Evergreen free

The CIO’s view of the week ahead.

César Pérez Ruiz, Head of Investments & CIO, Pictet Wealth Management

Weekly View - Evergreen free

The US economy continued to forge ahead last week, driving the S&P 500 index above 4,000 for the first time ever. The US purchasing managers’ index (ISM) for manufacturing reached a 35-year high, while Friday’s employment report exceeded market expectations, with the creation of 900k+ jobs. These will play out in economic gains in Q2 as the US economy reopens. This would be supportive of the USD and we favour developed over emerging markets. Markets were further encouraged by President Biden’s USD 2.25trn infrastructure package, which would reinforce US growth beyond 2021. If the bill is passed, the investment plan will span eight years, extending the boost created by the president’s USD 1.9trn stimulus package. Biden’s proposal is to fund the infrastructure spending with corporate tax rises, especially for companies that have hitherto benefitted from international tax loopholes, namely multinationals and tech giants. If executed accordingly, this plan could prolong the market rebalancing to cyclicals at the expense of growth-style stocks. We are overweight equities and advise investors to keep a well-diversified equity portfolio.

Several major investment banks were embroiled in the fallout of a relatively small family office’s highly leveraged and concentrated positions last week. Archegos had been on the receiving end of several large lines of credit, which it used to place concentrated bets. After Archegos failed to meet margin calls (requests for additional collateral) on its loans, a fire sale ensued, with Archegos at the heart of the largest bankruptcy in over two decades. This serves as a reminder that concentrated, leveraged bets are rarely successful in the long run. While those banks that had extended the leverage will suffer large losses, the banking sector has much stronger balance sheets today and no systemic risk has been exposed. We avoid excessive leverage at either the corporate or the investor level.

The Suez Canal blockage was cleared last week, after it threatened to prolong disruption to global supplies. Prices paid and delivery times continued to rise, indicating still-elevated pricing pressure. Last week’s OPEC+ meeting ended in agreement to gradually increase the oil supply from next month. This outcome resulted despite Saudi Arabia’s warning that the pandemic has not yet played out. The Kingdom has been disciplined in its production, imposing a voluntary cut on itself to bolster the market. We are positive on commodities.

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