Investment trends 2021: The biggest wild card is inflation
In conversation with Swiss wealth manager Julius Baer’s head of research on the market outlook
Christian Gattiker, head of research at Swiss wealth manager Julius Baer, talks about the market outlook for the remaining part of 2021, highlighting investment trends.
How do you think 2021 has fared so far? Were there any unexpected turn of events with regards to markets?
The year so far has turned out to be quite the recovery year we expected it to be. That said, the speed at which markets were pricing in these scenarios, especially the higher growth/inflation mix, was quite breathtaking.
This was particularly apparent in first quarter bond yields for 10-year treasuries, which doubled within a few weeks. That was quite spectacular when you consider what this triggered in the investment styles attached to it. A sharp recovery of value, cyclicals and small-cap stocks ensued.
On the political front, the biggest surprise was that the Democrats won control of Congress, which gave them a lot more traction to kickstart the US economy.
What is your outlook for the remaining part of the year?
We think many of the topics raised above will remain in place. So there’ll be further recovery, particularly in the US and Europe but also elsewhere. From an industrial standpoint, the momentum (acceleration) of the industrial cycle has probably peaked in the first half of 2021, but industrial production will remain supportive as supply chains have to heal and inventories have to be filled in a post-pandemic world.
Finally, the biggest wild card is inflation. There the recent surge is unlikely to be repeated, yet the upward pressure may persist until year-end as pandemic-related shortages are likely to take time to be filled.
Given the global vaccination drive, is there a specific asset class that will perform better than others?
An acceleration in the vaccination drive is generally friendly for risk-assets as the economic downside risks abate. So far, this has been to the benefit of China and Western developed markets, especially in equities and there to the segments outlined above such as value, cyclicals and small-caps.
Currently we see opportunities in healthcare related themes: genomics, digital health, extended longevity and healthy China are topics that investors should consider these daysChristian Gattiker
To see this broaden beyond these segments, a similar vaccination success will be needed in emerging markets. With the exception of a few smaller countries, this has not been the case yet. Alternatively, on a more constructive note, this could get priced into financial markets at some stage in the second half of 2021 as the prospects for 2022 improve for that matter.
What are some of the defining trends we can expect in the coming months? Will the pandemic continue to accelerate investments into areas such as genomics, fintech, e-commerce and the like?
The underlying investments in these areas will continue as the trends are long-term and unbroken. Yet financial investors will probably be more focused when assessing the different trends and the valuations of the assets involved. To give you an example: we downgraded our view on clean energy to “cautious” earlier in the year. There is nothing wrong with the structural trend in clean energy — to the contrary.
However, the share prices had more than tripled from the pandemic lows to early 2021. So caution was warranted in our view. Since then the correction has run its course with a drop of about 30% and we turned neutral in the space accordingly. This tells us that investing in long-term trends is also about tactical investing. There are opportunities in healthcare-related themes: genomics, digital health, extended longevity and healthy China are topics that investors should consider these days.
Do you see an impact on purchasing power due to inflationary changes?
Not yet. So far, wage growth has outpaced price increases. However, the latest spikes in inflation rates are likely to change that for some time. After the normalisation of the world economy will have taken place towards year-end the pattern of real wage growth should continue. We struggle with a new global inflationary era because of this health crisis.
For SA, I wanted to also add a currency view in general and end with a view on the rand?
For the currency space, our main assumption is that the US dollar entered a weakening cycle in 2020. The reason for that is the unprecedented monetary and fiscal response to the pandemic that will lead to growth outside the US via capital outflows into emerging markets.
On the other hand, the deteriorating fiscal position of the US will somewhat hamper the attractiveness of US government bonds and the greenback. However, short term, the view is more balanced between short-term tailwinds (US data superiority, tapering) and longer-term headwinds (broadening global recovery, US “boom-bust”, US tax hikes/political shift).
As for the rand, a loose monetary policy and a particularly long-lasting recession will keep pressure on the currency, even if the global risk appetite resumes. We hold our neutral, below-consensus view over the short- and medium-term. With poor healthcare, public finances stretched and commodity prices depressed, SA will be among the countries most severely hit by Covid-19.
The Central Bank cut its reference rate by 225 bps this year to now 4.25% and announced buying government bonds to inject liquidity. However, no guidance on volumes or timeline will be given. Further downgrades of SA’s debt rating and a particularly deep and long-lasting recession due to the effects of Covid-19 will weigh on investor sentiment and keep pressure on the rand.
For more information, visit www.juliusbaer.com.
Bank Julius Baer & Co. Ltd., Johannesburg Representative Office
Nelson Mandela Square
West Tower, 2nd Floor
Maude Street, Sandton
This article was paid for by Julius Baer.
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