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 possible pave the way in which for main economies to enter the reflation section of the restoration within the second quarter.
This era will possible be characterised by excessive financial development, rising inflation, low rates of interest and chronic 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 more likely to have obtained at the least one dose of the vaccine by the top of the primary quarter. On the present fee, 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 first 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 package deal in its entirety, overcoming pressures for a much smaller package deal.
The upshot is that development expectations are being revised up.
We anticipate gross home product (GDP) to be 9 per cent larger within the US by the top of subsequent yr in contrast with the top of 2019, 3 per cent larger within the Euro zone and 18 per cent larger in China. Equally, company earnings look set to be 24 per cent larger within the US subsequent yr in contrast with 2019, 7 per cent larger within the Euro zone and 39 per cent larger in China.
The prospect of accelerating development in addition to an anticipated spike in inflation has additionally pushed yields larger. The ten-year US Treasury yield has risen 85 foundation factors for the reason that begin of the yr to 1.75 per cent, whereas the federal fund futures market is now pricing in a single fee 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 property.
Essentially the most fast adjustment in yields seems to be behind us, in our view.
Yields are additionally rising for the correct purpose – larger development. 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 financial system “run sizzling” for some time.
With coverage charges on maintain and long-term yields larger, the yield curve will possible steepen additional.
We additionally share the Fed’s view that the spike in inflation is transitory and attributable to base results, in addition to demand-supply mismatches attributable to the Covid-19 pandemic.
In opposition to this backdrop, we predict danger property will proceed to carry out nicely and suggest the next methods:
Place for reflation
We not too long ago raised our forecast for the top of this yr for the S&P 500 to 4,200, and imagine 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 vitality sectors, whereas reopening winners embody small- and mid-cap shares.
Decreased credit score danger, rising shareholder distributions and steeper yield curves assist financials, that are probably the most attractively valued sectors globally.
Power 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 attributable to 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 expect shopper discretionary shares in Asia are a notable alternative.
Traders also needs to contemplate commodities, together with oil, copper, and palladium, that are beneficiaries of sooner financial development and can assist hedge in opposition to 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 international GDP development rebounds and central banks preserve 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 learn from an accelerating financial system and have traditionally been extra resilient than investment-grade bonds to rising charges. Dividend shares are one other various, as corporations that minimize payouts final yr improve them once more as earnings get well.
Asia additionally gives a number of the most compelling yield alternatives. Asia US greenback high-yield credit score may 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 related tenors within the US and minus 0.3 per cent in Europe. On a 12-month view and on the again of a sooner normalisation of financial coverage, the Chinese language renminbi ought to admire relative to the euro and the US greenback.
The transition right into a reflationary setting, dangers of potential shifts in fiscal and financial insurance policies, elevated institutional and retail exercise within the choices market and the rising share of development shares in main indexes all counsel continued elevated volatility within the coming months.
Pre-profit, early stage and costly tech shares are more likely to stay weak to volatility in charges. However not all tech firms are equal – some are cyclical, and others are money generative and worthwhile, which places them in good stead on this new market regime.
The hot button is to handle draw back dangers whereas staying uncovered to long-term secular tech disruption themes corresponding to 5G, greentech, fintech and healthtech.
Traders ought to use intervals of excessive volatility to section into large-cap tech corporations with established enterprise fashions and income visibility. We additionally like cyclical semiconductor and reminiscence chip makers that at the moment are benefiting from tight international provide, in addition to digital subscription fashions which can be already demonstrating regular income development and cash-flow era.
• The author is the Asia-Pacific head of UBS World Wealth Administration’s chief funding workplace.