Over the Short & Medium Term

We anticipate the economic recovery to continue in the second half of 2021, while the vaccination roll-out continues at different paces around the world. Developed markets seem to have been more successful in dealing with the COVID-19 – Delta variant relative to emerging markets (Japan excluded), something that in our view has created opportunities to increase risk exposure in certain underperforming countries. (Japan, China, Indonesia, Korea, Malaysia, Vietnam, India).

In our base scenario, we expect inflation pressures to continue over the medium term, however, we believe that this is a transitory period and inflation will subside.  We anticipate the 10-year Treasury yield to move higher over the medium term, toward 2%, but over the long term, we expect yields to remain at current low levels ranging from 1.2%-1.7%, while monetary policy from major central banks continues to be accommodative.  We also believe that fiscal stimulus coupled with higher tolerance from policymakers toward high-debt to GDP-levels will continue at least until the end of 2021.

Under these circumstances, we prefer equities relative to other risk assets. Equity indexes are likely to generate gains mainly because of expected growth of corporate earnings and attractive valuations. Therefore, we expect cyclical stocks to perform better relative to growth stocks with a gradual reopening of the economy.

We emphasize that higher yields over the medium term will support financials, insurance, real estate, materials, technology, and energy stocks. Financials will be supported because of the steepening of the yield curve and the credit growth, insurance by higher yields, materials by the rebound in the industrial production and infrastructure spending while energy prices will be a result of supply- demand as well as headline inflation. The later will also support real estate and the US housing market; that is in a relatively healthy state supported by the USD 40 bn monthly purchases of mortgage-backed securities by the FED.

Consequently, we maintain our long equity positions in the US and EU (S&P 500, Euro Stoxx 50), and we see further potential in emerging markets equities, specifically in Japanese and Chinese equity indexes.  In Japan, we like industrials, consumer discretionary, and materials, while in China we favor digital economy, infrastructure, materials, sustainability and commodities. That said, we are cautious on the technology sector and other regulatory risks in China that are likely to increase volatility.

Furthermore, we expect commodities to generate gains over the medium term. The reason is that commodity prices are highly correlated with inflation. Historically, the energy sector has outperformed when inflation was exceeding the 2% threshold.  We forecast oil to reach USD 80/bbl and copper at USD 11.000mt by the end of Q3. Overall, we expect returns on commodity indexes to exceed 8% by the end of 2021.

 

 

Investment picks: we like for Q4,2021

 

Equity Indexes: 

• US: financial, insurance, energy, real estate, technology, infrastructure, mid-cap.
• EU: health care, ESG, infrastructure, financials.
• Japan: industrials, consumer discretionary, materials.
• China: infrastructure, materials, digital economy, sustainability commodities.

 

Bonds: 

• Asian High Yield
• Chinese Government Bonds: 10-year offering 3%

 

Forex:

• Yuan: to appreciate relative to USD, to 6.30
• USD: to appreciate relative to EUR, to 1.14

 

Commodities: We like

• Oil: $80/bbl by the end of Q3, while at $73/bbl by the end of the 2021.
• Copper: 11.000 mt by the end of Q3
• EU ETS Carbon: heading towards $70 mt