Investors’ Outlook: A shot in the economy’s arm

Germany, the US, the UK, Russia, China, India, Japan, Kazakhstan – the number of countries involved in research and development of Covid-19 vaccines is growing larger by the day. In an age of seemingly decreasing international co-operation, this sends a message that pursuing a common goal on a global scale is still possible.

Fading risks fill the sails of financial markets…

With the US elections behind us without major hiccups, a risk that had been weighing on the financial markets over the past months is now gone. President-elect Joe Biden has reiterated his support to the 2.2 trillion US dollar second stimulus package on the table and announced an additional 7 trillion recovery plan, which is good news for the markets. The only hang-up: investors will probably have to wait until next year before these stimulus measures arrive. But the omnipresent Covid-19 risk still looms as global cases soar. Fears of more stringent lockdowns in the near term are, however, shrugged off by the markets on the news of promising vaccine candidates with high efficacy being around the corner. The start of their distribution could begin before the year-end, conditional on the final regulatory approvals. The economic damage of the ongoing lockdowns is thus viewed as a temporary one-off.

… so do easing geopolitical tensions and central bank support

The Biden administration will probably be a friendlier partner in trade negotiations. China, for its part, has sealed a massive multilateral deal, signing a free trade agreement with 14 countries across the Asia Pacific region. The Regional Comprehensive Economic Partnership is the world’s largest trade bloc covering nearly a third of the world’s population. While wars continue to rage around the globe, the one closest to Europe has been defused thanks to a Turkey and Russia-brokered cease-fire between Armenia and Azerbaijan. Such developments combined with central banks’ support should boost the markets even further in the future. The Bank of England last month surprised when it launched a new economic stimulus package worth 150 billion pounds (170 billion euros). The European Central Bank quickly followed suit, hinting that additional support will be on its way before Christmas.

With the above in mind, we continue to favor equities over bonds. We still like emerging market stocks given the region’s better handling of the pandemic Covid-19. This holds particularly true for Asia, which accounts for two-thirds of the emerging market indices. We keep our underweight recommendation on bonds with one exception: emerging market debt. We have upgraded this sub-segment to overweight given the relatively attractive yields and diversification benefits of such bonds. As for gold, its limited price upside has prompted us to trim our overweight position. However, we still cherish its quality as a shock absorber for unforeseen events and hedge against currency devaluations.

I hope you will enjoy this year’s final issue of our Investor’s Outlook. It is packed with detailed overviews of our macroeconomic scenarios for 2021, which promises to be a year of smoother sailing than the last.