The global health crisis caused a historic global growth shock during the first half of 2020. With a better control of the pandemic, economies have started picking up, although at different speeds depending on local health policies.
What can we expect of 2021? Stephanie Bigou, Global Macro Portfolio Manager at Seeyond shares her views.
- Further improvement in global macroeconomic and microeconomic fundamentals.
- We see value in Equities, credit but also cyclical themes.
- Volatility should remain high, while allowing Equity to post further gains.
- Inflation: not an immediate risk.
- Our core scenario is positive on equities, minding sudden drawdown risks and cautious on govies.
Why would inflation pick up, even at a moderate pace, now when it has been at the bottom for the last ten years?
Because, unlike the past cycle, monetary and fiscal measures to support the post-crisis economy were massive and above all synchronized on a global scale. In 2008, the lack of synchronization and fiscal austerity imposed on peripheral European countries in the midst of the debt crisis inhibited a sustainable recovery. It caused a succession of deflationary systemic shocks, weakened potential growth and drastically reduced the effectiveness of support measures. This mistake was not repeated in 2020.
Equity markets are too expensive. Why invest in equities today?
The expensiveness depends on the geographical area and metrics analyzed. While US stocks valuation appears high in absolute terms and historically speaking, European and Japanese stocks are less expensive, especially when looking at Shiller's P/E (cyclically adjusted). In addition, equities remain attractive in comparison with government and corporate bonds.
Everyone is already above historical exposures on stock markets. Who remain as buyers?
Investors’ allocation on equities is a little high without being at extreme levels yet. It should materialize in many jolts and consequently in high volatility. However, in such an exceptional context, it is not surprising to witness exceptional market dynamics and exceptional positioning. We are currently experiencing two transitions in terms of economic cycles: 1- we are at the beginning of a new economic cycle known as the major traditional Juglar cycle (5/11 years on average), and above all 2- we are beginning a new Schumpeterian super-cycle of innovation (20/30 years on average). At the end of the nineties, the fifth wave of Schumpeterian innovation based on telecommunications and the generalization of the Internet induced an historic increase in valuations and positioning. It was later called a bubble but the basis was real. Today, the beginning of the sixth Schumpeterian innovation wave based on nanotechnologies, digitalization of economies and ESG investing, is likely to cause the same craze from investors, especially since the health crisis amplified the trends among investors.
This article has been provided for information purposes only to professional clients as defined in the MiFID Directive. It must not be used for retail investors. The provision of this material or reference to specific sectors or markets in his article does not constitute investment advice or a recommendation or an offer to buy or sell any security. Investors should consider the investment objectives, risks, and expenses of any investment carefully before investing. Views expressed in this article as of the date indicated are subject to change and there can be no assurance that developments will transpire as may be forecasted in this article.