How do you think 2021 has fared so far? Were there any unexpected turn of events that caught you off guard with regards to markets?
The year 2021 so far has turned out to be quite the recovery year we expected it to be. That said, the speed at which markets were pricing in these scenarios – especially the higher growth/ inflation mix – was quite breathtaking.
Especially over the first quarter, bond yields for 10-year treasuries doubled within a few weeks. That was quite spectacular indeed when you consider what this triggered in the investment styles attached to it. A sharp recovery of value, cyclicals and small-cap stocks ensued.
On the political front, the biggest surprise was the fact that the Democrats won control over Congress, giving them a lot more traction to kick-start the US economy.
Looking ahead, what is your outlook for the remaining part of the year?
We think many of the topics raised above remain in place. So there will be further recovery, especially in the US and Europe but also elsewhere. From an industrial standpoint, the momentum (i.e. acceleration) of the industrial cycle has probably peaked over the first half of 2021, but industrial production will remain supportive as supply chains have to heal and inventories have to be filled in a post-pandemic world. Finally, the biggest wildcard is inflation. There the recent surge is unlikely to be repeated, yet the upward pressure may persist until year-end, as pandemic-related shortages will likely take time to be filled.
Given the global vaccination drive, is there a specific asset class that you see performing better than others?
An acceleration in the vaccination drive is generally friendly for risk assets as the economic downside risks abate. So far, this has been to the benefit of China and Western developed markets, especially in equities and there to the segments outlined above such as value, cyclicals and small-caps.
To see this broaden beyond these segments, a similar vaccination success will be needed in emerging markets. With the exception of a few smaller countries, this has not been the case yet. Alternatively, on a more constructive note this could be priced into financial markets at some stage over the second half of 2021 as the prospects for 2022 improve for that matter.
What are some of the key defining trends that we expect to see in the coming months? Will the pandemic continue to accelerate investments into areas such as genomics, fintech and e-commerce?
The underlying investments in these areas will continue, as the trends are long-term and unbroken. Yet financial investors will probably be more focussed when assessing the different trends and the valuations of the assets involved. To give you an example: we downgraded our view on clean energy to ‘cautious’ earlier in the year.
There is nothing wrong with the structural trend in clean energy – to the contrary. However, the share prices had more than tripled from the pandemic lows to early 2021. So caution was warranted in our view. Since then the correction has run its course with a drop of about 30 percent and we turned neutral in the space accordingly. This tells us that investing in long-term trends is also about tactical investing.
Currently we see opportunities in healthcare-related themes: genomics, digital health, extended longevity and healthy China are topics that investors should consider these days.
Given the pandemic, do you see an impact in purchasing power due to inflationary changes?
Not yet. So far, wage growth has outpaced price increases. However, the latest spikes in inflation rates are likely to change that for some time. After the normalisation of the world economy will have taken place towards year-end, the pattern of real wage growth should continue. We struggle with a new global inflationary era as a result of this health crisis.
Can you provide an overview of how recent global events such as the pandemic and US elections have impacted investor sentiment in the Middle East?
The biggest driver for investor sentiment for the Middle East remains the prospects in the commodity space, particularly oil. So far most events have been supportive to the oil price especially better growth prospects for the US due to the election outcome.
Hence revenues in the energy space should be supportive to investor sentiment in the Middle East. We expect higher oil prices until autumn 2021 as the demand push will not be fully compensated by supply response. Therefore cash-flows for oil producers should be ample. The wildcard is geopolitical crises but this is part of the investor experience here and nobody can possibly predict whether unforeseen events will hit the space in the coming months.