Asset Management

Investors’ Outlook: A bull run in the Year of the Ox?

Outlook
Dan Scott

Dan Scott

Chief Investment Officer, Head of Impact & Thematics

In 2020, the Chinese Year of the Rat brought twists and turns worthy of that shrewd animal. Will the Year of the Ox that started mid-February bring a bull run to equity markets?

Spring is clearly on its way, in atmospheric as well as psychological terms. Warmer temperatures, vaccination campaigns, and governments’ support measures have brightened the outlook for the months ahead. People are only waiting to splash their cash on dining, concerts, shopping, or travel, as soon as the ongoing restrictions are lifted.

This will give the battered global economy a welcome boost. Inflation may therefore temporarily overshoot the 2% target in both the United States and Europe. Their respective central banks are likely to look through this development. They have pledged to stick to their policies of low interest rates, helping not only consumers but also financial markets. US Federal Reserve Chairman Jerome Powell recently warned that the US economy is “far from” being where it needs to be. Meanwhile, minutes from the most recent European Central Bank (ECB) meeting show it will maintain “favorable financing conditions for as long as possible.”

The stimulus package worth 1.9 trillion US dollars unveiled by President Joe Biden prior to his inauguration is on track to be passed by Congress before mid-March. Even though it could turn out to be smaller than the proposed amount, the plan will still ensure that permanent job losses resulting from the second and third waves of the pandemic are kept in check. European governments have arranged similar rescue deals.

Yet we shouldn’t be blinded by the first few rays of spring sunshine. Uncertainties linked to the different vaccines’ efficacy as virus variants emerge and the general public’s degree of acceptance of the vaccines do linger. Sweeping lockdowns across Europe and restrictions in the Americas are still in place. Asia continues to fare better with far fewer reported cases.

Stick to equities, upgrade commodities

In view of all this, we continue to favor equities over cash and bonds. We stick to our overall positive view on equities, with a strong preference for emerging market stocks. Companies in these economies are not only relatively cheap, but also benefit from a weaker US dollar and Chinese stimulus measures. For similar reasons, we have upgraded commodities to overweight, also due to the expected release of pent-up demand.

Beware of the stampede

There are signs that the surge in money supply not only has encouraged institutional investors to take bigger risks, but also individual investors. The recent Bitcoin frenzy and surging interest for the trading app Robinhood, whose users have managed to move share prices, point in this direction. It also makes financial markets a fascinating, constantly evolving place prone to occasional stampedes of professional or retail investors. In the Year of the Ox, let’s therefore be reasonably bullish without losing sight of the risks.