SINGAPORE – The primary quarter delivered two surprises: faster-than-expected vaccine roll-outs and a bigger-than-expected United States fiscal stimulus package.
The backdrop of vaccination-led financial reopening plus substantial stimulus will probably pave the best way for main economies to enter the reflation section of the restoration within the second quarter.
This era will probably be characterised by excessive financial progress, rising inflation, low rates of interest and protracted volatility. We stay pro-risk in each equities and credit score markets.
About 28 per cent of the US inhabitants and 10 per cent of the European Union 27 inhabitants are prone to have obtained at the very least one dose of the vaccine by the top of the primary quarter. On the present price, the figures will climb to 70 per cent and 40 per cent, respectively, by the top of June. Vaccination drives in Asia are additionally gaining tempo swiftly.
At the beginning of the yr, few anticipated additional substantial US fiscal stimulus. However the Biden administration managed to safe approval for its US$1.9 trillion (S$2.6 trillion) fiscal stimulus bundle in its entirety, overcoming pressures for a much smaller bundle.
The upshot is that progress expectations are being revised up.
We anticipate gross home product (GDP) to be 9 per cent increased within the US by the top of subsequent yr in contrast with the top of 2019, 3 per cent increased within the Euro zone and 18 per cent increased in China. Equally, company earnings look set to be 24 per cent increased within the US subsequent yr in contrast with 2019, 7 per cent increased within the Euro zone and 39 per cent increased in China.
The prospect of accelerating progress in addition to an anticipated spike in inflation has additionally pushed yields increased. The ten-year US Treasury yield has risen 85 foundation factors because the begin of the yr to 1.75 per cent, whereas the federal fund futures market is now pricing in a single price hike late subsequent yr adopted by two extra in 2023.
We anticipate yields to rise additional, with the 10-year US Treasury yield reaching 2 per cent by the top of this yr, however we don’t see this creating issues for danger belongings.
Essentially the most speedy adjustment in yields seems to be behind us, in our view.
Yields are additionally rising for the correct cause – increased progress. Opposite to market pricing, the US Federal Reserve has reiterated that it has no plans to boost charges till the top of 2023 and is prepared to let the US economic system “run scorching” for some time.
With coverage charges on maintain and long-term yields increased, the yield curve will probably steepen additional.
We additionally share the Fed’s view that the spike in inflation is transitory and as a result of base results, in addition to demand-supply mismatches attributable to the Covid-19 pandemic.
Towards this backdrop, we predict danger belongings will proceed to carry out nicely and suggest the next methods:
Place for reflation
We lately raised our forecast for the top of this yr for the S&P 500 to 4,200, and consider cyclical sectors will profit significantly from financial reopening.
Rising yields may proceed to drive a rotation out of momentum shares into worth shares.
Reflation beneficiaries that look set to get a tailwind from easing mobility restrictions and a steepening yield curve embody the monetary and power sectors, whereas reopening winners embody small- and mid-cap shares.
Decreased credit score danger, growing shareholder distributions and steeper yield curves help financials, that are probably the most attractively valued sectors globally.
Vitality shares ought to profit from the restoration in oil demand; we anticipate Brent crude to rise to US$75 a barrel by the year-end.
Inside Asia, Singapore and India are amongst our most most popular markets as a result of their catch-up potential. Singapore banks ought to profit from each reopening and reflation, making them a favoured sector regionally.
Main Chinese language Web platforms are candidates to purchase on dips following their current sell-off, because the nation forges forward with digitalisation. We predict shopper discretionary shares in Asia are a notable alternative.
Traders must also take into account commodities, together with oil, copper, and palladium, that are beneficiaries of quicker financial progress and might help hedge towards the danger of extra persistent inflation.
Hunt for yield
Now greater than ever, traders are deeply divided over the outlook for longer-term rates of interest and inflation as world GDP progress rebounds and central banks maintain coverage charges on maintain.
Within the meantime, actual charges of curiosity (after inflation) on the most secure bonds look set to stay unfavourable, making the hunt for yield more and more difficult.
Nonetheless, we see alternatives in US high-yield and senior loans, which have a tendency to profit from an accelerating economic system and have traditionally been extra resilient than investment-grade bonds to rising charges. Dividend shares are one other various, as companies that reduce payouts final yr improve them once more as earnings get well.
Asia additionally supplies a few of the most compelling yield alternatives. Asia US greenback high-yield credit score might ship complete returns of seven per cent to eight per cent by the top of the yr.
Chinese language authorities bonds have a 10-year yield-to-maturity of three.2 per cent in contrast with 1.6 per cent for comparable tenors within the US and minus 0.3 per cent in Europe. On a 12-month view and on the again of a quicker normalisation of financial coverage, the Chinese language renminbi ought to recognize relative to the euro and the US greenback.
The transition right into a reflationary surroundings, dangers of potential shifts in fiscal and financial insurance policies, elevated institutional and retail exercise within the choices market and the rising share of progress shares in main indexes all recommend continued elevated volatility within the coming months.
Pre-profit, early stage and costly tech shares are prone to stay susceptible to volatility in charges. However not all tech corporations are equal – some are cyclical, and others are money generative and worthwhile, which places them in good stead on this new market regime.
The secret is to handle draw back dangers whereas staying uncovered to long-term secular tech disruption themes akin to 5G, greentech, fintech and healthtech.
Traders ought to use durations of excessive volatility to section into large-cap tech companies with established enterprise fashions and income visibility. We additionally like cyclical semiconductor and reminiscence chip makers that at the moment are benefiting from tight world provide, in addition to digital subscription fashions which are already demonstrating regular income progress and cash-flow era.
• The author is the Asia-Pacific head of UBS World Wealth Administration’s chief funding workplace.