Category: Economic Outlook
Economic Commentary Q1 2021
We have entered a new investment order. The Covid-19 pandemic has accelerated profound shifts in how economies and societies operate. We see transformations across sustainability, inequality, geopolitics and macro policy. This is reflected in our 2021 investment themes: The New Nominal, Globalization Rewired, and Turbocharged Transformations. The new investment order is still evolving, and investors will need to adapt. Yet the features are becoming clear, and we believe this calls for a fundamental rethink of portfolio allocations – starting now. The New Nominal We see stronger growth and lower real yields ahead as the vaccine-led restart accelerates and central banks limit the rise of nominal yields – even as inflation expectations climb. Inflation will have different implications to the past. Strategic implication: We underweight government bonds and see equities supported by falling real rates. Tactical implication: Our low rate outlook keeps us pro-risk. We like U.S. equities and prefer high yield for income. Globalization Rewired Covid-19 has accelerated geopolitical transformations such as a bipolar U.S.-China world order and a remaking of global supply chains – placing greater weight on resilience and less on efficiency. Strategic implication: We favor deliberate country diversification and above-benchmark China exposures. Tactical implication: We like EM equities, especially Asia ex-Japan, and are underweight Eur
Economic Outlook
The second quarter of 2020 was one for the history books. COVID-19 caused a global pandemic that led to deaths in more Americans than the wars of Vietnam, Korea, and the Gulf Wars combined, and led to “stay-at-home” mandates that caused a sharp, deep recession in Q2 when nearly 20% of Americans were unemployed.1 In May and early June, after many thought the curve of new coronavirus cases had been successfully flattened, economic reopening occurred across the country. Within weeks the virus spread, however, and the US entered the July 4th weekend reporting record numbers of new cases of over 50k/day.1 This is double the rate seen in mid-May with total cases now totaling 2.8m, up from 200k cases at the end of Q1.1 Reopening plans have been rolled back in many states. Generally, the level of uncertainty regarding the virus is growing, not falling. Despite this environment, risk assets enjoyed strong rallies throughout the quarter, leading to discussions of the disconnect between Main Street and Wall Street. Backed by massive monetary stimulus from the Federal Reserve, fiscal stimulus from the Treasury, some early success in the reopening and hopes for a vaccine, US stocks had their best quarter since the fourth quarter of 2008.1 US stocks were again led by the large-cap Technology and other popular growth stocks, leading to concerns of narrowing market leadership that has some resemblance to the dot.com period of the late-90’s. After falling 35% i
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