Investors’ Outlook: Virus mutations don’t infect our predictions
As if the thick snow cover in Europe and our long nights weren’t enough to remind us of the cold season in the northern hemisphere – we’re in the midst of a dark winter, rendered bleaker by lockdowns sweeping across Europe as well as restrictions in the Americas and Asia. So what about the miraculous cure everybody is waiting for? It’s still unclear whether the current vaccine optimism will turn into disappointment due to mutations of the Covid-19 virus, any lower-than-expected efficacy of the jabs, or the reluctance of part of the population to be vaccinated.
On a more positive note: despite cutting our global growth forecast for the first quarter, we have raised it for the two following quarters, as the vaccine rollout and warmer weather should help to contain the virus. Central banks across the globe will continue to hold the economy’s hand via record-low interest rates and other supportive measures. US Federal Reserve Chairman Jerome Powell recently reaffirmed that the ongoing asset purchases won’t be wound down early. Even though inflation rates are now edging higher, the new normal is the old normal – low rates combined with low inflation and slow growth.
In the US, the Democrats have, for the first time in a decade, secured the control of both chambers of Congress. The two Senate seats won in Georgia give President Joe Biden more room to implement announced measures such as large-scale investments in green energy, repeals of many of the tax cuts passed by his predecessor, and a new rescue package worth 1.9 trillion US dollars to combat the economic fallout of the pandemic. European governments have initiated similar programs to revive their economies and curb unemployment. The trillions pumped into the world economy shouldn’t lead to any overheating, as long as the labor markets remain weak and inflation contained.
Is the market correction a distant memory?
What about equity markets, which not so long ago experienced an unprecedented downturn? They are energetic given that the worst in terms of lockdowns seems over, vaccines are on their way, liquidity keeps flowing, and some strong economic data are coming in. Analysts, a bit too pessimistic in the past, have started upgrading their earnings estimates. Valuations look stretched but remain cheap on a relative basis with earnings set to improve over the coming months. We, therefore, stick to our overweight in stocks, with a clear preference for emerging markets. Companies in this region not only benefit from the governments’ better handling of the Covid-19 pandemic or fading trade war fears following the departure of Donald Trump. They are also valued at attractive levels.
As for bonds, our underweight recommendation remains unchanged, mostly because of our cautious view on government bonds and parts of the corporate segment. At the same time, emerging market bonds remain the most attractive asset in the fixed income universe. On the alternative investments side, gold should be overweight given the weaker US dollar and the shining metal’s allure in uncertain – and, somewhere down the line, inflationary – times.
To round off these economic and market predictions with a weather forecast: rest assured that a brighter spring is slowly but surely on its way.