More than a year after the outbreak of Covid-19, recovery trade is in full swing, reads Pictet Wealth Management’s house view for May 2021.
Underscoring its optimism, the Swiss wealth manager has raised its global GDP forecast to 6.0% from 5.8% previously. Across the major economies, Pictet expects the US to grow at 6.5% for the rest of the year, the European Union at 4.5% and China much higher at 9.2%.
“We believe the whole global economy is really picking up momentum quite nicely. The access and the speed to vaccination will continue to be the key factors that we look at when we look at economic recovery for different countries and different places,” says Evelyn Yeo, head of investments in Asia at Pictet Wealth Management.
But the rapidly-evolving pandemic has curbed enthusiasm surrounding certain markets. The sudden resurgence of Covid-19 cases in Taiwan and the worsening situation in India, for example, could cause a drag on the recovery of developed economies and are not part of Pictet’s base case. “For India, specifically, we have revised downwards our GDP forecast for the fiscal year from the previous 10% to 8.2% now,” says Yeo in an interview with The Edge Singapore.
Covid-19 has been particularly brutal on India’s economy as the country is “very much driven by the services sector”, says Yeo. As of Jan 4, the services sector is the largest sector of India, accounting for 54.77% of India’s total Gross Value Added, notes India’s Ministry of Statistics. The industrial sector places second at 27.48% while agriculture and allied sectors share 17.76%.
See: After spurt and slump, Asia Pacific stocks to do better in 2H2021: Indosuez
Outside of India, Pictet’s bullish house view is built upon the mass vaccinations underway in developed countries, which should protect these major economies. “As of May 27, close to 1.8 billion shots have already been administered across 176 countries. This represents 11.6% of the global population and translates to around 30 million doses per day, which is quite significant,” says Yeo.
Yeo points to the quickening pace of vaccination. “It took the world 61 days to administer the first 100 million doses and only five days for the most recent 100 million doses to be administered. So, I think that that gave us a lot of confidence on that front.”
However, the vaccine disparity across countries mirrors global income inequality. “[Countries] with the highest income tend to get [their] people vaccinated faster and the speed we are talking about is 30 times faster than the countries with the lowest income,” says Yeo. “In the short term, I think this will provide some clues on the relative speed of economic recovery, or even reopening.”
Growth engines
As some developing economies grapple with the fallout from Covid-19, the world’s two largest economies are charging ahead with recovery, albeit with vastly different strategies. The US economy has surprised on the upside by bringing out the big guns, notes Yeo, mainly due to the faster than expected vaccine deployment and the larger than expected fiscal stimulus.
“Massive fiscal stimulus in the US and Europe, together with enduringly dovish central banks, are adding to the sense that markets are living through a ‘Goldilocks moment’,” notes Pictet in its house view.
Americans are also spending their stimulus cheques on the stock market. “Amid the optimism, there are also grounds for caution, especially regarding the US market. Massive amounts of retail money are streaming into equities, stoking a range of irrational market fads,” adds Pictet.
For now, that massive stimulus is an important growth engine, says Yeo. “However, even after the US economy is fully opened and all pent-up demand has been met, it will take a lot of structural changes to maintain high growth.”
That structural change relies on the success of Biden’s proposed US$1.7 trillion ($2.3 trillion) infrastructure plan, which also includes other expenditures, like home care for the elderly. In response, the Republicans have countered with a US$928 billion plan, which draws from funds already set aside for other purposes. “Given the bipartisan nature of the US policy-making process, I think this is going to create some uncertainty for the US [economy],” says Yeo.
China, on the other hand, has had the “first in, first out” advantage with Covid-19. Recovery in China remains solid, notes Pictet, although it lowered its 2021 GDP growth forecast to 9.2% from 9.3%.
Since mid-2020, China has been the one pulling the rest of the world along in terms of growth recovery numbers, says Yeo. While industrial activities continue to be buoyant, China’s domestic consumption has been rather slow, she adds. In stark contrast, China has a lower vaccination rate of 20%, compared to the 45% in the US, and it is also not relying on large-scale fiscal stimulus.
Rather, China looks to be withdrawing liquidity to manage their economy, says Yeo. “I guess this is also understandable. After having grown the economy for the past 10 to 15 years, I think they are in a better shape to do that right now.”
Auto, airlines, banks
So, what should investors look at? Yeo is “very positive” on quality cyclical stocks, along with companies that have weathered the pandemic well with strong balance sheets.
The automobile, airline and banking sectors are the “common suspects”, she says. “I think auto is also in a very interesting inflexion point. Over the past year, there have been more thematic content on electric vehicles, so we’re not just looking at automakers but also their ability to innovate and adapt to disruptive technology. So, we’re looking at the whole value chain, [including] battery suppliers [and] software makers,” says Yeo.
Many beleaguered airlines depend on government support, notes Yeo, resulting in varied outcomes across countries. “We probably are not there yet, in terms of going full-on bullish on airlines. But it’s worth watching that front.”
Some strong US banks have proven their mettle last year, along with some Asia players with strong balance sheets. But with rising interest rates on the horizon, Yeo highlights the importance of bad debt provisioning, to ensure that banks are not overly exposed. “I would say that commercial banks would benefit from rising rates in the future.”
See also: Credit Suisse updates investment 'supertrends' amid Covid-19
On the global tech sector, Yeo also outlined three headwinds faced by the industry: regulation, tax hikes in the US and valuation. While the recent antitrust crackdown on Chinese tech giants may have had a chilling effect on the sector, Yeo thinks it is unlikely to derail long-term growth potential.
She likens it to the US in 1998 when Bill Gates was brought in front of Congress in a hearing about whether Microsoft was abusing its market power in the software industry. “While it can be painful in the short term, it will be a healthy progress for the overall industry. Stronger companies will ultimately emerge stronger and this will help sift out the winners from the losers,” says Yeo.
The massive infrastructure spending proposed must come from somewhere, says Yeo, and Biden is reportedly mulling a corporate tax hike to 28%. For companies with a market capitalisation above US$200 billion, the average tax rate last year was 16%, adds Yeo.
Should Biden raise taxes, Pictet’s projection shows that profits from these companies will fall by between 7% and 15%. That said, tech companies have stronger growth potential than other companies. “Tech companies naturally have a bigger moat in terms of competitive advantage, which is why they draw a lot of attention with antitrust regulations … So, they will take less time to recoup this 10%–20% reduction in the profit than their peers.”
The recent consolidation has also brought tech companies’ valuation back to reality. “Relative valuations are now more attractive,” says Yeo. “Just take for example the Chinese internet names; their P/E is now trading below their five-year average, which is very rare and the upside potential ranges from the midteens to over 50%.” “While we like the sector, we also advocate selectivity and looking from a portfolio diversification angle as well.”
Alternative commodities
In a weekly outlook published on May 25, César Pérez Ruiz, CIO at Pictet Wealth Management, ruminated on Bitcoin’s plunge the week prior. “The most recent Bitcoin price correction brought attention to how potential increased interference by Chinese authorities and US regulators add another hurdle to the prospects of cryptocurrencies in general,” wrote Ruiz.
“We are of the firm view that regulation and security around cryptocurrencies have been necessary and will only grow more critical,” he adds.
Instead of fulfilling its namesake as a form of currency, Yeo likens cryptocurrency to “digital gold”. “While we do not have a strong view on crypto, we recognise that there are divergent views in the markets, with the most recent view that it could eventually become a diversification alternative to bullion.”
Yeo also sings a different tune on the recent suggestions of an upcoming commodity supercycle. “We are of the view that the current price rally is temporary for commodities and unlikely to indicate another supercycle. If we compare it to 10 or 15 years ago, the commodities supercycle at that time was mostly driven by China’s very strong growth.”
“At that point, China was growing massively. Steel companies, iron ore companies; they were chugging ahead during that time,” she adds. “But now, China is in a very different [stage of its] life cycle. Instead of pumping money, like what they did after the 2008 financial crisis, to boost the economy, they’re now withdrawing liquidity. So, we don’t think there’s going to be a commodities supercycle at this point.”
Photo: Bloomberg
