Current phase no longer ideal for equities, but still positive overall

Investment Policy, July 2021

Current phase no longer ideal for equities, but still positive overall

We are expecting the environment for equities to remain constructive, as global economic growth should strengthen further. However, as inflation is now also trending upwards, it is probably only a question of time before capital market interest rates – which have paused for breath – continue their upward march. So while the current phase may no longer be the ideal “Goldilocks” phase, equities and their returns still look rather more appealing than bonds, which continue to offer very poor yields from a historical standpoint.

The ongoing rollout of vaccine campaigns and brisk manufacturing activity are the key drivers of the global economic recovery. Analysis reveals a number of differences between the various regions of the world in this respect. Whereas – with a few exceptions – the emerging markets are at a rather less advanced stage in their vaccination campaigns, the economies of the world’s developed nations, and particularly the USA, are benefiting from their progress on this front. In addition, the fiscal support provided by the US government is proving hugely beneficial for the global economic recovery. The boost that rising US demand is giving to European exports is a key positive for the economies of both the Eurozone and Switzerland this year. The flip side of rising consumer demand is the pick-up of inflation. However, where inflation manifests itself more because of company price increases and less due to negotiated salary/wage increases, this should ultimately be positive for the development of corporate earnings. Therefore, this trend should deliver a better outlook for equities than for bonds, particularly as yields on the latter remain at historic lows.

Equities
The recovery of economic activity and corporate earnings is proceeding apace. This is clearly evident from company results published in the US and in Europe in the late spring. In both regions, more than 70% of quarterly results turned out better than the consensus predictions of the analyst community. What’s more, much the same can be said of sales as well as earnings. As an additional factor, the magnitude of the positive surprise in corporate earnings results was also unusually pronounced in a historical comparison. Owing not least to base effects, European earnings growth proved particularly strong compared to the US this time around. As European equities underperformed their US counterparts over the course of 2020, they should still have plenty of catch-up potential this year. Another factor that could help the European equity market outperform its US counterpart is the former’s greater proportion of value stocks compared to growth stocks.

Where the emerging markets are concerned, we are currently adopting a neutral positioning. Although valuations do not look steep, the pandemic situation is currently looking more acute again in some regions, such as parts of Asia and Latin America. Swiss equities remain interesting: in a long-term comparison they are attractively valued compared to the MSCI World Index, while the leading Swiss companies also stand out from a quality standpoint.

Looking back over the last few years, European stocks have catch-up potential compared to their US counterparts.

Gérard Piasko, Chief Investment Officer

Bonds
In light of rising inflation in Europe and the US, bond yields currently appear too low when viewed in a historical context. This is true of both corporate and government bonds, and not just in the developed economies. In the high-yield segment, the improvement in the corporate earnings of the European and US companies is a positive factor. However, the extremely low additional yield offered by high-yield bonds compared to government bonds is less positive. Viewed together, this suggests the high-yield segment should be assigned a neutral evaluation right now. Meanwhile, upward inflationary pressure continues to point to an underweighting of the fixed-income asset class overall.

Currencies
With Eurozone economic data better than predicted by analysts, the euro has been exhibiting strength against both the Swiss franc and the US dollar for some time now. The greenback, too, has softened at times due to certain US economic data turning out weaker than expected – for example with respect to the American labour market. We remain neutral regarding these currencies, as it is difficult to predict whether US or European economic data will surprise more positively over the next few weeks or even months. In our view, both Europe (including Switzerland) and the US look set to enjoy an acceleration of economic growth over the next few months. At the same time, the main feature of this year’s currency movements – volatility in both directions, for the most part unpredictable – is likely to remain with us over the coming months.

Commodities
Gold benefited from two factors in May. On the one hand, the weaker US dollar has proved helpful, as it makes gold cheaper for non-US investors. On the other hand, real interest rates have come down somewhat as inflation has risen by more than international bond yields. This development has also benefited equities and other commodities. In addition, the price of oil has risen on the back of stronger demand from industrialized nations now that some of the coronavirus restrictions have been lifted. The OPEC+ countries are adhering to their existing supply control agreement. Industrial metals are also pointing higher, supported by better economic growth, particularly in the US. For all commodities, the development of real interest rates now look like taking centre stage over the coming months. Particular attention should be paid to any sign of a possible tightening of monetary policy by the world’s leading central banks. 

Gérard Piasko

Gérard Piasko

Gérard Piasko is Chief Investment Officer and head of the investment committee of private bank Maerki Baumann & Co. AG. Before he was for many years Chief Investment Officer of Julius Baer, Sal. Oppenheim and Deutsche Bank.

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This publication is intended for information and marketing purposes only, and is not geared to the conclusion of a contract. It only contains the market and investment commentaries of Maerki Baumann & Co. AG and an assessment of selected financial instruments. Consequently, this publication does not constitute investment advice or a specific individual investment recommendation, and is not an offer for the purchase or sale of investment instruments. Maerki Baumann & Co. AG does not provide legal or tax advice. In addition, Maerki Baumann & Co. AG accepts no liability whatsoever for the content of this document; in particular, it does not accept any liability for losses of any kind, whether direct, indirect or incidental, which may be incurred as a result of using the information contained in this document and/or arising from the risks inherent in the financial markets.

Editorial deadline: 18 June 2021

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