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Financial markets have turned optimistic, driven by COVID-19 vaccine developments. We have upgraded to a positive view on equities and remain slightly positive on fixed income. However, investors should be prepared for uncertainty in the path of economic recovery and possible policy changes due to new political developments.
Financial markets have turned optimistic, driven by COVID-19 vaccine developments. We have upgraded to a positive view on equities and remain slightly positive on fixed income. However, investors should be prepared for uncertainty in the path of economic recovery and possible policy changes due to new political developments.
Equities
We are currently neutral on the US as valuations appear stretched, with corporate earnings recovery and growth being reliant on further fiscal stimulus. We see selective opportunities within Europe, given a watershed fiscal agreement (EU Recovery Fund). However, COVID-19 infections need to be managed well for Europe’s recovery to be stronger. We remain negative on Japan despite greater political stability, as it remains heavily reliant on a pickup in global demand.
In Emerging Markets, we are not optimistic on Latin America, Eastern Europe and the Middle East, all of which either have less room for more stimulus given unsustainable deficits, or may be too reliant on commodity prices for growth. A better control of the COVID-19 situation could lead to an upgrade on this outlook.
Asia ex-Japan, especially China, is where we think the best opportunities lie, especially with more attractive valuations (P-E Ratio: 15.5x) than developed markets (P-E Ratio: 20.6x). With better virus control throughout Asia, coupled with China’s economy recovering, exports and earnings are expected to improve in the region, supported by the signing of the Regional Comprehensive Economic Partnership (RCEP).
Fixed Income
Central banks are likely to keep their monetary policies loose to support economies as companies adapt and remodel. This implies that interest rates are likely to stay low for longer. We are slightly overweight on fixed income, but investors have to be selective as not all segments present great value.
We are negative on government bonds as yields remain low and unattractive, and they remain vulnerable to unexpected spikes in inflation. Corporate investment grade (IG) bonds will be supported by easy monetary policies, and we prefer Asian investment- grade (IG) bonds for their relatively higher yield of 2.0% to 2.5% and wider spreads than the broader global bond index. As for high yield (HY) bonds, we turned neutral as the current yields may not compensate for the possibility of higher defaults should economic conditions continue to weaken.
We are neutral on Emerging Market bonds as yields and spreads are now less attractive and could widen if COVID-19 infections remain uncontrolled, causing global trade to take longer than expected to recover.
Currencies and Commodities
The US dollar is likely to gradually weaken against both developed market and Asian currencies as the Fed continues its easing programmes and as US interest rates remain low for longer.
The pick up in global demand and OPEC+ production cuts will likely push oil prices to USD 55/bbl by Q3 2021. We expect Gold prices to remain supported on the back of central bank easing, rising to USD 2,000/oz by Q4 2021.
