Outlook for the rest of 2021

Evelyn Yeo Head of Investments Asia, Pictet Wealth Management

At Pictet, we believe the global economy is picking up momentum. Despite fresh coronavirus concerns in places and worries about supply bottlenecks, world trade and industrial production are now above their pre-pandemic levels. After China, the recovery in the US has been exceptionally fast, with growth likely to be back on its pre-Covid trajectory by the end of 2021. We have raised our US GDP growth forecast for 2021 to 6.5 per cent.

China's Q1 GDP figures rising by 18.3 per cent y-o-y are largely in line with expectations and show another quarter of solid recovery. Our current projection is that Chinese growth will reach 9.2 per cent in 2021, thanks to recovery momentum and a favourable base effect.

Rising global demand should benefit Asian exporters broadly. This backdrop is also relatively supportive of emerging markets for 2021. Within Asian equities, we are focused on three areas:

The Unlocking Value Exercise in Asia - We expect this mainly in Singapore and Hong Kong, which includes a mix of M&A, asset disposal or listing, reorganisation and heavy cash return exercise.

Selective opportunities in China - We expect China's robust recovery to continue, supported by exports and improvements in household consumption despite some near-term headwinds.

Rest of Asia - We prefer other markets such as Korea, Taiwan and Vietnam. A brightening global growth outlook should be of broad benefit to Asian exporters, including Taiwan.

South Korean and Taiwanese equities continue to benefit from a combination of skyrocketing demand and supply bottlenecks for semiconductors worldwide. Vietnam was among the few rated sovereigns to sustain positive economic growth in 2020, while introducing only a modest stimulus package during the pandemic.

Selectivity is key in Asia, as rising US yield may continue to weigh on north Asian equity markets and Covid-19 is still hurting India and the Philippines.

With the Fed likely to remain dovish for some time, this has led to renewed talk of inflation. We think we will see a spike in cyclical inflation in the next couple of months, but core inflation will thereafter moderate as structural factors kick in.

While we believe that the breakeven inflation rate should not move much from current levels, the rise in real rates is leading us to increase our year-end forecast for 10-year US Treasury yields to 2.1 per cent, and to a lesser extent, German Bunds.

Rising rates bode well for banks for higher interest income, while reopening of economies helps the release of bad debt provisioning and the resumption to normal dividend and share buyback.

This year, we believe the unleashing of pent-up demand will benefit a range of consumer-related and other cyclical sectors that have suffered hard during the pandemic (our key theme - ''Revenge of the Losers''). Other value or cyclical stocks are also expected to catch up after lagging last year. We prefer quality companies with balance sheets that have withstood the crisis. However, we also continue to favour technology companies with structural growth advantages.

Sameer Deshpande Regional Investments Head, Asia, Citi

The resurgence of new cases in India accounts for a rapid rise of infections in Asia even as vaccinations have accelerated meaningfully since March. The markets leading in terms of vaccinations have done better since late March - including Singapore, Malaysia and- North Asia EM (emerging markets).

Outlook for the US economy has improved both due to vaccinations and the strong fiscal stimulus. In particular, the combination of the Covid-19 and infrastructure plan stimulus is likely to play a major role in lifting economic growth not only in the US but also the rest of the world via higher imports. Asian equities are generally positively correlated to rising US Treasury yields (particularly as rising yields are driven by rising demand and inflation, which benefit Asian exports).

It's worth noting that just ahead of the Covid-19 induced shock, the world economy was in the midst of a decade-long economic growth cycle with a benign inflationary environment, and interest rates still much lower than pre-global financial crisis levels. As we enter the second year of the new economic cycle, the global recovery remains uneven. China and the US are clearly driving the recovery with parts of Europe and Asia lagging behind both due to re-emergence of infections as well as a slower pace of vaccination.

Along with strong recovery in the US, inflation and interest rates are likely to follow. With a record fiscal stimulus in the US, its inflation is likely to be higher than the long-term rate in the coming year. We expect inflation to top 3 per cent in 2021 before settling down in 2022, although at higher levels than in the prior decade.

Led by the US and China, global equities delivered strong double-digit returns in 2019 and 2020. The positive momentum continued into the first quarter of 2021, and while the post-pandemic rally was driven by the technology sector, there has been some rotation into Covid-cyclical sectors including financials, industrials and energy. This strong performance nevertheless has led investors to question high valuations especially in the tech sector. Despite a robust 1Q earnings season, tech shares face potential headwinds from the Biden administration's plans to increase taxes. We believe now is a time when risk management - generating income, controlling entry points and hedging to limit downside risk - may be more appropriate.

While we expect positive returns for equities in the year ahead, they are likely to be moderated vs. the strong rallies that resulted from the powerful rebound from the crisis lows a year ago. We favour healthcare within equities and variable rate bank loans within US high yield credit. Current falling default rates support the high yield sector and variable rate bank loans yield 4.5 per cent p.a. with roughly one-third the volatility of equities. They will also not only benefit from the recovery in credit quality as the recovery broadens but also eventually from the normalisation of US policy rates.

Hou Wey Fook Chief Investment Officer, DBS Bank

Asia's economic recovery has mainly been led by China and the US. These economies are demonstrating strong resilience, aided by accelerated vaccination and stimulus rollout.

Export-oriented economies such as Korea, Taiwan and Singapore are benefiting from a strong recovery in the tech sector, while Indonesia, Philippines and Thailand, which are more dependent on domestic consumption and tourism, are still coping with weak domestic economic recovery due to lingering restrictions. With the virus resurgence in India, risks of a new wave remain in other parts of Asia, especially after the festive season.

We believe the strong recovery in tech is sustainable. The pandemic and new consumption trends have accelerated digitalisation, as well as demand for semiconductors and electronic components. In contrast, recoveries in emerging Asean may be further delayed. We thus prefer North Asian markets over emerging Asean.

We believe high inflation in Q2 is mainly transitory because of low-base effects. At the same time last year, the impact of pandemic-driven lockdowns was at its worst.

The Fed has also reiterated its tolerance for higher inflation in the near term. We think talks of excessive inflation are misplaced given that we are about 10 million jobs away from maximum employment. Moreover, the Fed has yet to see success despite decade-long efforts to generate inflation. The Fed is likely to maintain its dovish stance, and rate hikes are unlikely to materialise until 2023.

The rise in bond yields is part of normalisation from very low levels since last year. Bearing in mind that global economies have yet to return to pre-Covid levels of activity and are still relying on fiscal stimulus, it will be hard to see the US 10-year bond yields rising beyond 2 per cent this year (the pre-pandemic range was between 2-2.5 per cent).

The tech sector has rallied as a result of accelerated digitalisation. The world is still in early stages of transitioning into a digital economy, and a long runway remains for this long-term, irreversible growth trend.

Valuations should take into consideration the current low interest rate environment, and the new business models of these technology companies. Today, these companies possess sustainable profitability and strong free cash flows while delivering attractive shareholder returns.

Tech leaders are in stronger positions given that: (1) revenue is generated on a global basis with recurring income as part of the revenue mix, (2) their ability to develop advanced devices and own intellectual property patents, and (3) high scalability.

We believe the tech sector will gain cyclical leadership as growth moderates in the second half. Since August last year, we have advised investors to embrace some optimism on the likelihood of vaccine discovery. This rotational switch out of the tech sector into the vaccine discovery trade is showing signs of fatigue as we track the Nasdaq vs US small caps index, where the relative underperformance of technology is turning the corner. We expect the positive momentum to continue.

Michael Fredericks Head of Income Investing, Multi-asset Strategies and Solutions group, BlackRock

The impact of Covid-19 globally has been volatile and uneven. More recently, the virus data across emerging markets, including Asia, has been troubling as many regions face second and third waves. In particular, the surge in new cases/fatalities in India, evidence of a new variant, and slower vaccine rollouts have led to some weakness across EM equities.

Ultimately, we expect volatility to stay elevated across emerging economies in the near-term due to virus uncertainties. Still, emerging economies are typically significant beneficiaries of accelerating growth in developed markets. Over the next several quarters we expect that the US and Europe may likely post double digit GDP growth.

Thus, we remain favourable on emerging market equities with a preference for Asia as a strengthening global recovery and more widely available vaccines should set the stage for EM strength later this year. The recovery will not be uniform and tracking single country progress is paramount. We see this as an opportunity for active managers.

The powerful economic restart is well underway in the US and this momentum will build in the coming months, fuelled by huge fiscal stimulus from the Biden administration. Combined with a relatively favourable monetary policy backdrop and impressive corporate earnings, we come away with the US being our preferred equity market. European equities also tend to be more cyclical and stand to benefit from a stronger global growth backdrop.

We expect short-term interest rates to remain at or near zero for quite some time, probably through 2022. We think the direction of travel for longer-term interest rates is higher. An acceleration in vaccine-led reopening activity and firming inflation support the case for higher yields.

The 10-year Treasury yield is already up over one per cent from the 2020 lows, a sizeable move considering the low starting point. This implies the path higher for rates should be more modest and less of a straight line up.

Furthermore, inflation expectations, the initial catalyst for higher yields, have moved up considerably. It's also worth noting that much of the expected increases in inflation come from more transitory factors such as higher commodity prices and base effects. Longer-term, it remains to be seen how persistent inflation can be, especially considering big secular forces such as ageing demographics and the disinflationary impact of technology working against it.

Our overall expectations are for yields to move modestly higher, but we do not see runaway inflation or sharply higher yields upsetting the recovery in our base case.

History tells us equities can survive higher rates as long as the catalyst is stronger economic momentum, not tightening financial conditions. The pace of the increase is also very important. Rapidly rising rates can negatively impact financial markets. However, this is not our base case.

In terms of valuations, we still think equities look compelling when measured against fixed income and in the context of a strong growth environment, even if they are expensive in an absolute sense.