Macroeconomy

Weekly View - The covid Olympics begin

PWM’s view of the week ahead.

César Pérez Ruiz, Chief Investment Officer, Pictet Wealth Management

Weekly View - The covid Olympics begin

A Chinese sportswoman may have scooped the first gold medal in Tokyo and China may currently be topping the medals table at the ‘Covid Olympics’, but the going has been tougher for Chinese stocks. The MSCI China has plunged as the authorities continued to rein in high-flying sectors. Having already cracked down on financial and technology companies, the regulators’ sights have now turned to tuition firms. The argument that regulatory clean-ups were needed may well carry some weight in the medium term—but while we await more clarity, we prefer to concentrate on developed markets rather than emerging ones.

While US equities rose to new records last week, they showed themselves to be extremely sensitive to future growth signals and coronavirus news, with doubts forming around the ‘reflation trade’. True, an intraday sell-off was followed by a swift rebound as investors were encouraged by strong corporate results and headline economic data that remain generally robust. However, together with the Delta variant, we already see markets beginning to express concern that growth momentum may have peaked, with important question marks surrounding the strength of consumer spending in the US and the persistence of supply shortages.  These are some reasons risk assets might remain choppy for a while, with further strong earnings reports needed to justify lofty valuations.

Risk assets can also continue to count on the support of central banks. Last week, the ECB formally moved to a symmetric inflation target that suggests there is little risk of a euro area rate hike until 2024, while the ECB’s quantitative easing will continue in some form for quite a while.  Following in the footsteps of the Fed, the ECB also decided to lift restrictions on bank dividends, imposed when the pandemic first struck. This fortifies our decision to focus on dividend growers as an investment theme.  The Fed meets this week, with no big announcements expected. Although it could start signalling a reduction in asset buying at its Jackson Hole symposium in August, we think it will be happy to stay ‘behind the curve’ on inflation. In other words, a Fed rate hike is still someway off (perhaps end-2023). For these reasons, with nominal yields in Europe and the US well below growth and inflation, we are happy to remain underweight government bonds.

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