Five insights in five minutes
Pricing in growth
Last October we flashed you the chart below as debate raged over whether asset prices had rebounded too quickly relative to growth. Constructed by our strategy team, it tracks a portfolio that is long economically-sensitive assets and short defensive ones as a proxy for the growth markets are implying. At the time, many worried that valuations were stretched. Yet our index had barely retraced half its pandemic fall – and that was before a single vaccine had been approved. Jump forward six months and the mega run in risk assets has finally pushed this indicator above pre-Covid levels. Bears are in deep hibernation – median short interest as a percentage of S&P 500 market capitalisation, for example, is at a 17-year low. So now what? Clearly more than twice the growth is priced in today than when we last pondered the chart. But global output was negative then and is forecast to rise six per cent this year. And that is about twice the growth rate in 2018 when the index was still much higher than today.
Themes: global equities, fixed income, alternatives
Whither the dollar
Everyone and their lockdown-puppy was bearish on the dollar in January. That made being long the greenback the most obvious trade of the year so far. Having risen about six euro cents in the first quarter however, the dollar has given up half of them in April and is down about two per cent on a trade-weighted basis. As can be seen in the chart below, investors changed their minds just in time to be wrong again, moving from the most extreme underweight position since the financial crisis 14 years ago – as per the futures market – to a mildly positive stance by the end of last month. Where’s the dollar heading for the rest of 2021? Bloomberg has helpfully asked over a hundred currency experts and 60 per cent of them reckon the year-to-date rise versus the euro will not endure. A similar number also believe the dollar eases from here on a trade-weighted basis, as well as against the pound and renminbi. So you know what to do then!
Themes: multi-asset, emerging markets, US assets
With a timely nod to Earth Day this week, a new monthly record has just been set for global corporate and government green bond issuance – an impressive $70 billion in March, according to the latest Bloomberg data. Europe accounts for about half the one trillion euros of worldwide ESG bonds issued. As we note in our latest Europe Insights publication, furthering this growth is the European Commission’s plan to start issuing up to €800 billion in bonds from July as part of a recovery fund dubbed ‘NextGeneration EU’. Almost a third of the amount will be dedicated to green bonds, solidifying Europe as the global leader in the asset class. Importantly, these bonds will be pooled, with repayments coming from the multiannual budget financing framework and new taxes. And the EC’s backing means they should benefit from high credit ratings and potentially tighter spreads compared with other euro supranational bonds. A gift for our planet.
Themes: green bonds, European fixed income
With some keen to party like it’s 1999 amidst easing social restrictions, our strategists predict much fizz in service demand ahead. As can be seen in the chart below for America, services make up two thirds of personal consumption but spending has recovered only 60 per cent of the decline versus pre-Covid levels. This matters for inflation and interest rates because a surge in demand could exceed the pace of re-hiring in these sectors, pushing wages and prices temporarily higher. Leisure and hospitality alone accounted for almost half of US job losses during the pandemic. If bottlenecks are limited to a few sectors only, however, labour supply should shift to meet new demand relatively quickly. Other inflationary factors are also at work, however. A basket of global metals prices, for example, is up 60 per cent in the past 12 months. Thankfully, both drivers are short-run. Our strategists still believe US inflation in the medium term will be around the Federal Reserve’s target of two per cent, even if risks are now to the upside.
Themes: US and global assets
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