The recovery is gaining momentum around the world driven by strong tailwinds. The vaccination campaign is being rolled out. Significant improvements have been made in the US and the UK while the Eurozone is still lagging. Central banks are maintaining their dovish message having reaffirmed their willingness to keep base rates low for the foreseeable future and continuing buying sovereign and corporate bonds. Governments, notably in the US, have announced massive investment plans, which should help secure growth over the long term. Households have excessive amounts of savings which will drive consumption.
In March, key economic indicators therefore reflected a global upswing in manufacturing, even in countries where vaccination roll out is still lagging. The ISM surveys showed strong components and were very promising for future growth. Surprisingly enough, services components have also improved in countries where mobility restrictions remain in place. Global reopening should be well advanced by summer, at least in developed countries, as the vaccination roll out is gaining momentum.
The normalization phase is under way
Investors have been setting up reflation trades. The yield curve has been steepening again. This trend was clearer in the US than in other countries, where fiscal plans and vaccination rollout is not as dynamic.
The most significant signal was increasing mid-term inflation outlook as central banks have expressed limited concern over a short term inflation spike. As we expected, spreads between US yields and Europe and Japan have widened significantly.
Equity rotation towards cyclical and value stocks has performed well. The European banking sector clearly benefited from this environment.
US equities, notably the SP500, returned a strong performance. The US Dollar has gained ground for the third consecutive month on the back of higher economic growth expectations in the region.
In a context of sustainable growth and strong monetary support, recent trends in yields and value rotation should continue. However, if history is of any help, this phase usually coincides with a stronger performance among non-US stock markets, due to their cyclical and value profiles. US growth usually benefits the rest of the world, notably Japan.
Risks to this increasingly positive scenario
While March has cleared up many uncertainties, some risks remain.
Risks associated with vaccine efficiency against new variants have not completely disappeared. Some emerging countries suffer from a lack of vaccine supply, which could delay global reopening.
Another risk that we identify is an uncontrolled rise in bond yields that could potentially be triggered by a demand shock and growth overheating. The next inflation figures in the US during Q2 will be watched closely as growing investors’ fears might induce an equity correction.
Geopolitical tensions may arise between the West, China and Russia. The new US administration seems to prefer a more diplomatic approach but might adopt a tougher stance over the long term.
Our current multi-asset strategy
We remain overweight equities and a portfolio bias towards reflation trades.
This strategy includes being overweight European equities with a preference for small and mid-caps, overweight emerging equities with an increasing interest in Latin America (a laggard in the aftermath of the peak of the crisis), overweight US small and mid-caps, and overweight global banks (a sector that usually benefits from a rate increase). We are overweight Japanese equities vs the US.
In the fixed-income market, we remain underweight government bonds but with a preference for German and Italian government debt over US debt. We remain long commodities, which should still benefit from the catch-up in demand.
We tactically reduced our exposure to the European banking sector and rolled into the European food & beverage sector. We took profit on our exposure to the spread between US and European yields . We switched our long strategy in SP500 favouring Japanese equities.