Economic forecasts brighten

Investment Policy, May 2021

Economic forecasts brighten

Respected international organisations such as the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) are raising their economic forecasts not just for 2021, but also for 2022. Stronger global economic growth has the effect of supporting corporate earnings, and therefore equities as an asset class compared to bonds. Nonetheless, given the prolonged upward march of stock markets we have scaled down our overweighting of equities to a minimum in order to lock in profits in positions that we have held for quite some time.

The OECD recently increased its forecast for the growth of the global economy significantly. For 2021, it now expects global economic growth of 5.6%, a sharp rise on the previous estimate of 4.2%. Its forecast for 2022 has likewise been revised upwards, namely from 3.7% to 4.0%. The principal reason for the upgrading of global economic growth forecasts is a more positive appraisal of the US economy: the OECD has more than doubled its forecast for US economic growth, namely from 3.2% to 6.5%. In view of the various US economic stimulus packages, which now amount to more than USD 5,000 billion in total, US economic growth of even 7-8% this year appears possible. However, this could lead to a more pronounced rise in long-term interest rates. Equity market segments that are less influenced by current economic developments and more dependent on the future (so-called “long duration” equities) will become increasingly vulnerable against a backdrop of rising long-term interest rates and bond yields.
 
Equities
The ongoing economic stimulus emanating from both the executive arm of the US government and its legislature will have two consequences: On the one hand, the focus of equity investors is increasingly shifting to companies from sectors that are sensitive to economic developments and can therefore be expected to generate particularly strong earnings growth in 2021/2022. On the other, the new focus will also lead to some profit-taking in the stocks that have been favoured by investors recently – such as companies whose growth plays out over a longer timeframe and/or are less dependent on the economic recovery of 2021/2022. This applies to all regions, and is explained by the strong performance of “long duration” companies over a prolonged period. The valuations of these companies have outstripped those of their more cyclical counterparts in recent years (cf. our Market Comment “Value or growth?” of 7 April 2021). Given the clear recovery of the global economy, we remain overweight in equities. However, we have decided to marginally scale back this overweighting in order to take profits in “long duration” stocks, i.e. equities of minimum volatility or in the robotics sector that we have held for a long time.

Economic recovery favours equities over bonds.

Gérard Piasko, Chief Investment Officer

Bonds
The further improvement in the global growth outlook prompted by yet more US economic stimulus has sparked off new trends in the fixed-income markets in the current year. Driven by developments in the US bond market, government bond yields now look to be trending upward for the medium and long term. The reason for this is the ongoing rise in inflationary expectations. In the Eurozone, the European Central Bank (ECB) is trying to counteract this phenomenon with larger bond purchases – but with mixed success: European bond yields have also risen sharply, but not to the same extent as their US counterparts. This means that the ECB will have to go to even greater lengths in its bond-buying activities, as the demand for European bonds is currently slack due to their comparatively lower yields. Otherwise the ECB risks losing credibility. Overall, we are therefore sticking to our underweight position in the fixed-income segment, which dates back several months.

Currencies
The most frequently traded currency pair of all, EUR/USD, has exhibited little in the way of strong movement recently, in contrast to the currencies of a number of emerging market countries. The biggest losses of all have been suffered by the Brazilian real and the Turkish lira. Both countries have been forced to raise interest rates to support their currencies, a development that does nothing to improve their growth prospects. In addition, the heads of government of both countries have been interfering so vigorously in monetary policy that neither country can truly be said to have an independent central bank any longer. The Swiss franc has exhibited a certain amount of weakness recently against the euro and the US dollar. This reflects the inevitable decline in demand for a currency that is so sought-after as a “safe haven” at times of economic crisis, and should come as no surprise in view of the upgrading of global economic growth forecasts.

Commodities
Gold glittered more in 2020 than it has done so far this year. In this respect its position resembles that of the Swiss franc, in that demand has weakened in the face of an improved economic outlook. Increased investor interest this year has revolved around those commodities that benefit from stronger industrial production. This favours the more cyclical commodities such as oil. While it is true that members of the Organization of the Petroleum Exporting Countries (OPEC) and countries allied to it (the so-called “OPEC+” group) approved a slight increase in production at their last meeting, the global supply of oil is still around 6.55 million barrels per day below pre-coronavirus oil production levels. 

Conclusion: When economic stimulus increases – as is currently the case – prioritising equities over bonds is only logical. Although we remain overweight in equities, we are scaling back this stance by taking profits in some long-held positions.

Gérard Piasko

Gérard Piasko

Gérard Piasko is Chief Investment Officer and head of the investment committee of private bank Maerki Baumann & Co. AG. Before he was for many years Chief Investment Officer of Julius Baer, Sal. Oppenheim and Deutsche Bank.

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Editorial deadline: 21 April 2021

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