In our second Experts In-House event of the year, held at the end of March, we delved deeper into our recent quarterly CIO Insights report for 2021 – including the thinking behind its name, ‘Signs of Light’.
With Spring here and vaccination programmes making material progress, we all have reasons to feel cautiously optimistic. And the overarching takeout from our most recent Experts In-House event is that investors can afford to feel the same.
Over the course of two informative sessions in late March, we heard from Christian Nolting, our Global Chief Investment Officer, in conversation with Tuan Huynh, Chief Investment Officer for Europe and Asia; and Deepak Puri, Chief Investment Officer for the Americas.
Together they shed light on the key highlights from our recent quarterly CIO Insights report, and answered questions from the audience on everything from inflation to ESG.
Here are some of the discussion points from the sessions. To read the full quarterly CIO Insights report, ‘Signs of Light’, please click here.
A V-shaped recovery led by Asia
Christian Nolting started both sessions by talking in broad strokes about performance over the last year, and how far the markets have come from the dark days of March 2020. Since then, we’ve seen the MSCI Asia ex-Japan up 65%. The S&P 500 has risen nearly 60%. Europe has lagged behind a touch, but only relatively speaking – the German DAX is up 50% and EUROSTOXX 40%.1
In terms of future growth, it will be no surprise that eyes are looking East. The Chinese economy is forecast to expand by 8.7% in 2021 and 5.5% in 2022. But this will not be the only big growth number in Asia. Off the back of a tough 2020, India is forecast to grow by 11% in 2021, and 6.5% in 2022.2
Elsewhere, Christian Nolting added that short-term growth forecasts will have a clear correlation to progress in vaccine roll-outs: “Hence we have upgraded our forecast for the UK and especially the U.S.,” Nolting said. “And we’ve downgraded the Eurozone for Q2, because we don’t think it will be possible to lift the economy completely.”
Government support – sowing the seeds for inflation?
The extent to which governments have piled in to support the economy was highlighted by Nolting: “If you look at the Global Financial Crisis of 2008–2009, what we’re seeing is that the economic impact of coronavirus is roughly one fourth of that so far. The measures taken, though, are four times the amount.” Puri added that the speed and directness of these measures has been equally impressive – eclipsing both the New Deal and the Marshall Plan.
The question is what happens next? One fear is that economic recovery will be accompanied by much higher levels of inflation. U.S. inflation expectations are already running at over 2%. Central banks have tried to play down the inflation threat, arguing that, with economies operating under capacity, the threat of inflation driven by aggregate demand is minimal. The CIO team’s annual inflation forecasts for 2021 and 2022 reflect this generally benign view. But what we may continue to see are spikes in prices of certain commodities and goods as demand outstrips supply during the reopening phase this year.
The inevitable tax return
In terms of other fall-out from the scale of government support, Deepak Puri raised the issue of taxes, specifically in relation to the U.S. economy. “Corporate tax is probably not going to get to 28% – maybe it goes from 21% to 24-25%,” Puri said. “But the treatment of capital gains, increasing the marginal tax rate for U.S. taxpayers, all that is on the cards.
“Overall, if it’s a $3.5 trillion package you are expected to fund at least half of it via tax increases. There are going to be higher taxes, no doubt about it.”
“Our recent report is called Signs of Light – and that’s a rising sun not a sunset – because we think, not only from a macro perspective but in general, better times are ahead.”
Global Chief Investment Officer and Head of Investment Solutions, Deutsche Bank International Private Bank
The asset class mix for the year ahead
Hyunh and Puri also took us through which asset classes they would recommend taking a closer look at in the year ahead. Both looked to Asian markets, which are recovering faster from the pandemic than the U.S. Asian credit is a target in terms of sub asset classes in the fixed-income space, along with EM Sovereigns: “These are the areas we would prefer our clients to take a closer look at for their fixed-income exposure,” said Puri. “Both of them have upwards of 4.5% return expectations, higher than U.S. High-Yield or Investment Grade Corporate.”
Hyunh also discussed earnings. In an audience poll he asked which region is expected to have the highest earnings growth over the next 12 months. Seventy percent of the audience said Asia over the U.S., Japan and Europe, and Hyunh agreed: “MSCI Asia ex-Japan is already back to pre-crisis level, in contrast to, for example, STOXX 600 which is well below. The recovery not only on the economic side but also on the earnings side has already taken place in Asia. We think this should further continue. You are absolutely right to expect that Asian credit and Asian equities will recover faster than the rest of the world.”
Currencies and commodities: dollar strength but no rebound for gold
After an extended period of weakness in 2020, the U.S. dollar stabilised towards the end of the year, with an upward move looking likely through the rest of 2021. “We feel that the dollar should benefit from a little bit of an interest-rate differential, but more importantly the growth differential that we expect versus the European Union,” Puri said. “So we anticipate the Euro/Dollar to be around 1.15, 12 months out.”
On commodities, our panel agreed stronger global demand should, everything else being equal, translate into higher commodity prices. Chinese oil demand has recovered sharply from the dip. Indian and Brazilian demand has also been increasing. Other commodities, for example copper, have also benefited from rising demand.3
Gold, as always, is a special case. Inflation fears have not translated into a rise in demand, with investors reacting negatively instead to increasing yields. Investor demand for gold appears to have eased, with the global price down around 15% from its mid-2020 high, and a major rebound is not expected.4
Key investment themes accelerated by COVID-19
Will the recovery mean we revert to type, or will the build back be different? From an investment perspective, Nolting said his key long-term investment themes have not been altered by COVID-19. If anything, they have been accelerated. Healthcare, digitalisation and consequently cyber security have all been catapulted forward, and massive investment in these areas will continue. ‘Millennials’ as an investment theme is also not going anywhere; 40% of the working age population in 2030 will be millennials. While technology also remains a fundamental driver.
The rise of sustainable investing – but will it sustain itself?
Finally, in both sessions, our speakers discussed what they’re seeing as a shift in attitude towards ESG investing, with increased demand from the client side. Nolting pointed to the significant outperformance of the S&P Global Clean Energy Index in comparison to the old-world MSCI Energy Index. While Biden’s focus on green infrastructure as part of the Recovery Plan is likely to build momentum further.
Can it keep going? Nolting was asked by the audience if he thought ESG might become a bubble. “We’ve seen a lot of money going in. The question is will that continue? I would say yes, it will,” Nolting said. “Because now there’s also regulation coming in. It certainly has the potential… to go into a bubble. So we need to risk-manage that. But I think we are just at the beginning, with all continents now waking up to this.”
Read the full quarterly CIO Insights report, ‘Signs of Light’ here.