From recession to recovery: The Covid-19 shock is sharper and shorter than those in previous cycles because it’s the first-ever recession by decree. When economies have managed to reopen last summer, albeit temporarily, things have bounced back more quickly than in recessions triggered by policy tightening and balance-sheet repair. Policymakers in countries hard-hit by the virus will likely continue to cushion the blow to private-sector income from lockdowns through significant fiscal stimulus. Governments can afford to borrow and spend heavily as central banks look set to keep the liquidity taps wide open, to anchor nominal and real rates at very low levels. Debt burdens will be higher, but monetary easing will ensure affordable debt service costs.
From virus to vaccine: What’s changed lately is that, despite some logistical challenges and new virus mutations, Covid-19 vaccines are being rolled out. This is the main difference between 2020 and 2021. The availability of effective vaccines is likely to be followed by the rapid immunisation of high-risk groups, including the elderly, those with existing health problems and healthcare workers. Following this phase, vaccines should begin to be distributed more widely, perhaps as soon as the second quarter of this year. This progress is likely to allow many sectors to reopen, some partially at first and some more fully. In turn, this means that a lot of spare capacity could be put to use as the economy starts to pick up again and we’ll be in the early stage of a new cycle.
Here’s why this matters:
From rally to rotation: Assets geared to accelerating growth should benefit during the early phase of the cycle. Specifically, equities and higher-risk credit should outperform high-quality bonds. Breakeven inflation should rise further. As safe-haven assets lose their appeal, the US dollar should continue to weaken, which is likely to benefit emerging markets. Gold, another portfolio diversifier, also tends to lose some of its shine in the early phase of the cycle. Our current tactical asset allocation reflects this overall risk-on theme. We’ve already seen some of these trends playing out last year. We expect them to last through this year, with more to go especially where there’s a still a ‘gap’ – in asset classes, countries and sectors, themes and investing styles most affected by the virus outbreak.
From winter to spring: One of the main things typically happening in early cycle is that demand for smaller and more cyclical businesses strengthens, while the discount for lower-quality companies drifts lower. To further strengthen our conviction, we’ll be looking for more evidence that safe and effective vaccines are being rolled out according to our expectations. We’ll also keep an eye on whether Covid-19 infection rates fall at the pace we envisage, facilitating a rise in activity during the second quarter. In addition, we’ll be tracking whether the macro dataflow picks up to match what we project in our base case. Our forecast envisages a difficult winter, as lockdowns continue. But we’ve pencilled in a bounceback in economic growth from the coming spring.
Meanwhile, looking at the latest political developments…
Georgia on my mind: Democrats have now gained control of the Senate (with a razor-thin majority, basically with Vice President-elect Kamala Harris being able to cast tie-breaking votes), House and, of course, the White House. Havoc on Capitol Hill has captured much of the news, though market sentiment has proved more resilient. A ‘unified blue’ government is likely to lead to greater fiscal stimulus – and to support a gradual rise in bond yields (though the Fed will likely mitigate any sharp increase), reflation and rotation. This is why a poor US jobs report, mostly due to temporary Covid-19 effects, didn’t have much of an impact on investor confidence the other day. Outside of fiscal policy, most other legislation would likely need 60 votes to pass in the Senate – a high bar.
Daniele Antonucci | Chief Economist & Macro Strategist
This document has been prepared by Quintet Private Bank (Europe) S.A. The statements and views expressed in this document – based upon information from sources believed to be reliable – are those of Quintet Private Bank (Europe) S.A. and are subject to change. This document is of a general nature and does not constitute legal, accounting, tax or investment advice. All investors should keep in mind that past performance is no indication of future performance, and that the value of investments may go up or down. Changes in exchange rates may also cause the value of underlying investments to go up or down.
Copyright © Quintet Private Bank (Europe) S.A. 2021. All rights reserved.