Where will economic growth accelerate next as vaccine rollouts allow more and more economies to reopen? Will it now be the turn of continental Europe and then emerging markets?
In the US, stagflation worries have emerged amid signs that growth is peaking. Higher-than-expected inflation numbers have so far not caused inflation expectations over the medium term to move, but we believe this calm will not last. In the eurozone, we see scope for core government bond yields to rise further as economies reopen, inflation expectations rise and the ECB remains dovish.
Uncertainty over the interest rate and growth outlook in the US have left markets looking for direction. This may have damped investor enthusiasm for US equities, leaving room for European equities to make up some of the ground lost relative to US stocks.
In the medium term, though, we expect countries and regions such as Japan and emerging markets to offer better prospects as ‘reopening momentum’ shifts.
We currently favour risk and equities, expecting EM ex-Asia and Japanese equities to benefit from a broadening global recovery. US value stocks have room to catch up with the mega-cap heavy S&P 500. We are long EMU small caps, whose valuations are more attractive relative to large caps.
We are underweight EMU government bonds since we expect yields to continue to rise, but we are long emerging market local debt given the room for EM currency appreciation. We are bullish on commodities over the medium term and have added a long position in US infrastructure via a basket of stocks that should benefit from President Biden’s infrastructure spending plans.
For more on our views and details of our portfolio positioning, read:
