There is strong evidence that economic and earnings growth have improved and will likely continue to support a healthy investment climate in 2H2021, say experts from UOB Asset Management (UOBAM).
However, this is a unique period as the global economy is in a state of transition, moving from the initial rebound from the pandemic lows of 2020, which was buoyed by strong stimulus policies, to a new phase of momentum-driven expansion.
“Our view is the global economy will transition well and the expansionary cycle will continue for several more years. However, markets may meanwhile struggle to find their new footing and sweet spots during the adjustment from the initial bursts of recovery to a more normalised and organic expansion mode,” says UOBAM.
UOBAM believes that investment markets are likely to perform well in the coming year but near term, the asset manager remains modestly cautious and is on the lookout for signs of market consolidation before resuming its positive momentum.
Therefore, UOBAM is keeping a neutral stance in the short term but staying constructive in its longer-term positioning. With that, the asset manager has reduced its weightage on equities to “neutral” while keeping an “overweight” on high-yield credits and staying overall “neutral” in fixed income and “overweight” in commodities and alternatives.
In a fireside chat looking into the investment outlook for 2H2021, Anthony Joseph Raza, head of multi-asset strategy, believes that this is a good time to invest as the combination of strong market growth and low rates in 1H2021 have contributed to a healthy environment for investment markets, in particular for equities, commodities and other growth assets.
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“Some of our key news now is that we still believe that we are in a period of healthy expansion. But in the near term, we don’t think the market is likely to go through some process of what we call transition,” says Raza.
“We are going through the year with a strong peak growth now while moderating to more normal expansion levels. This does not have to be bad for markets. But in the transition period, we think these are periods where markets can be a little unstable in the short term. So, for the near term, we’re a little bit more neutral and cautious on risk assets. But on a medium- to long-term basis, we’re still quite constructive,” he adds.
Adding on, Dharmo Soejanto, head of investment partnerships & solutions and chief investment strategist of UOBAM Invest, notes that there was strong growth so far this year although that was partly because of the lowbase effect. “Because of the sharp recession, the recovery was equally sharp. This was also partially helped by easy monetary policies held by a lot of governments around the world that were practising fiscal stimulus. They were spending almost 20% of their GDP to support income and businesses.”
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“This year, we still see some tapering or withdrawal of those stimuli, especially with fiscal support. So this year, the growth will probably slow down to about 6%. Although this is still above-trend growth, coming off a 20% growth, it can feel like a sharp slowdown. I think that is probably some of the change in momentum or velocity that people tend to view the hardest and that give people pause in the sense of reassessing how they think about the economy and money,” adds Soejanto.
The whole point of economic stimulus during recession periods like now is to “prime the pump and jumpstart” the economy. Once the economy gets going at a stronger pace, that jolt to the stalled economy is no longer needed.
However, while the economy is improving, Soejanto is keeping an eye out on current inflation. In particular, there is a concern this inflation may not be transitory, according to his analysis of recent m-o-m inflation numbers which have been trending up.
Looking at some underlying numbers that have brought up this concern, Soejanto notes that although prices from used cars to airline tickets are adjusting due to supply-chain bottlenecks, he believes it is the price of oil and certain commodities such as copper and agriculture that is causing higher inflation numbers than the market expects.
Raza agrees price inflation is coming from the supply chain bottleneck issues and key risks persist but believes this inflation is transitory and sees these issues going away, albeit not quickly.
“I won’t be convinced that there is an inflation problem until I see it in wages. There may be some reasons to believe that wages are going up. But wages have been suppressed for a long time and trends like automation are so big that I would still be a little doubtful that wages really face continued sustained upward pressure and that deflationary forces of the last couple of decades still weigh on the markets to a fair degree,” says Raza.
To that end, Raza believes the US Federal Reserve Board, which is convinced that inflation is transitionary, will be deciding this factor.
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“The Feds have a biased team who should allow some inflation to happen. So as long as it doesn’t get badly out of control, I still think we’re in a healthy environment that’s going to be conducive to investment markets,” says Raza.
Photo: Bloomberg
