The timing of a sustainable rebound in global economic growth hangs on the successful rollout of coronavirus vaccines – opening a window for investors to seize on valuation gaps ahead of market pricing, writes Aberdeen Standard Investments' Irene Goh.
We predict the global economy will pick up in the second quarter of 2021 but not rebound until the second half as the approval, production and distribution of vaccines will take time.
The more inoculations that come online, the faster the process of growth normalisation will be. Still, authorities may need to bridge delays in vaccine rollouts with adequate monetary and fiscal support.
Although we expect the US to convene an independent advisory body and push through emergency authorisation of accredited vaccines by January 1, some countries will take a more cautious approach to mass inoculation – likely slowing the overall global growth rebound to the second half of 2021.
China has the manufacturing capacity to produce 750 million vaccines in 2021 , but with a population of 1.4 billion and agreements in place to share its vaccine rollout with countries including Brazil and Indonesia, the process looks sure to stretch into 2022.
We suspect Covid-19 will be endemic and never fully eradicated – much like the flu. Based on current studies, vaccines will provide immunity for two years or less and will need to be renewed.
Although equity markets have reacted positively to news on vaccine developments, investors have yet to price in a global growth recovery fully. Should growth normalise, we would expect a bounce in select stock markets, currencies and commodity prices in line with a pick-up in industrial production.
Equities in Japan, Australia, Europe and the UK look attractive based on upward revisions to forecast earnings. Markets are not fully pricing in this earnings recovery, which has created investible gaps.
Although price-earnings valuations for global equity markets look stretched relative to history, this is largely due to a pandemic-related collapse in earnings. Hence, valuations would likely be supported by the anticipated recovery in earnings. In fact, equities remain in fair value territory versus bonds, meaning investors can still find relative value.
The key risks to our view would be a slower growth trajectory than we expect, likely due to delays in the distribution or uptake of vaccines; renewed geopolitical tension if president-elect Joe Biden is more assertive than we anticipate in his first 100 days in office, triggering volatility ahead of growth; and the possibility of a taper tantrum as the global economy normalises.
In addition, most incoming US presidents have replaced the head of the Federal Reserve. Although Fed chairman Jerome Powell’s term runs until February 2022, any move to replace him would be a 2021 discussion. That could alter the trajectory for policy and stimulus and could blindside markets.
A rebound in global growth would likely be positive for stock markets skewed to value, such as in Europe, Australia and Japan. They have heavy allocations to financials, industrials and real estate – sectors that lagged amid the pandemic and would benefit from a catch-up in trade.
While we also anticipate a recovery in the energy sector over time, a global increase in oil reserves following the collapse in prices earlier this year means inventory levels are high. This will take time to clear before investors start to see demand outpace supply.
We would anticipate further correction in communication services and tech stocks devoid of long-term structural support and drivers – whose performances were enhanced during Covid-19 – and some rotation into underappreciated cyclical sectors leveraged to a revival in domestic economic growth. This could benefit ASEAN markets, a number of which are also highly leveraged to the global trade cycle. They have strong current account balances and are under-owned by global investors.
We expect the US dollar to weaken. The outcome of the second-round election run-off in Georgia will determine the final make-up of US Congress. We give a 70% chance that Republicans take a majority in the Senate , which would create challenges for expedient fiscal policy-making and mean Biden could struggle to push through his substantial spending and other legislative agendas.
Although we expect a short-term Covid-19 support bill to be passed in early 2021, a modest $1 trillion stimulus or less might not be enough to sustain US growth. Monetary policy will have to remain very accommodative, likely creating rising differentials in growth and inflation between the US and nations in Asia and Europe, thereby putting downward pressure on the dollar.
Dollar weakness will favour Asian and emerging market currencies and non-dollar assets. We also expect the euro to rebound, provided the pandemic does not spiral further out of control.
Markets are pricing in no rate hikes by the US Federal Reserve until 2025 – suggesting the front-end of the interest-rate curve will remain flat and credit spreads compressed. This will drive investors seeking yield further down the credit-risk spectrum.
In fixed income we believe emerging market corporate debt stands out. The segment has a record of bouncing back after market drawdowns of more than 2% . Emerging market corporates boast higher yields and lower leverage than developed peers, and dollar weakness would bode well for the asset class in 2021.
On the alternatives front, we are positive on the outlook for real estate in an environment where business activity normalises. As productivity returns across developed and emerging markets, vacancy rates should drop and office rentals rebound.
We are also constructive on the prospects for infrastructure driven by fiscal stimulus dollars. Many governments have also set improved environmental and social goals, providing a long-term tailwind for renewable and social infrastructure.
This sector offers investors differentiated revenue streams, with higher starting yields than developed market rates and extra return potential, creating a cushion against rising inflation tied to tolls and utility bills.
We also find valuations attractive in the mezzanine segment of asset-backed securities. Unlike other asset classes, central bank support has not filtered through to asset-backed securities to the same degree, allowing investors to enjoy a healthy yield pick-up for a similar level of credit risk they are taking versus other fixed income assets.
Irene Goh, head of multi-asset solutions, Asia Pacific, Aberdeen Standard Investments
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