China is the North Star of Asia
The title for our Q2 Outlook last year was “China will be the first out of the global storm”. China was the first into the Covid-19 storm and it was the first major country out of it. That view has gone from strength to strength, as for the last 3 quarters of 2020 China has dragged up the rest of North Asia and given the rest of the world a floor. With China being the North Star of the region, North Asia is the proven winner in a world consumed with Covid.
Yes, vaccines were announced on November 9th and the rollout continues, with the new US President Joe Biden hoping to roll out 100 million vaccines within in his first 100 days in office. Yet for the majority of the Northern Hemisphere (US and Europe) who are in their winter season, it will be at least summer before the vaccine is fully rolled out and virus-linked restraints are lifted sufficiently to allow economies and society to go back to the free flow of activity that most of North Asia has enjoyed for a number of quarters (with some occasional hiccups). What’s quite amazing is that China and North Asia were able to do this without a full rollout of the vaccine, so they can go from strength to strength, while economic growth in Europe and the US, and most of the rest of the world, likely takes a breather before overshooting in H2 of this year.
It is also worth noting two other key factors regarding China. Given the basing effects from 1H20, they will likely need to ramp up their activity and roll out stimulus going into Q2 of this year to get year-on-year comparisons at the preferred levels. China will also mark the 100th anniversary of the founding of the Chinese Communist Party on July 1st and will no doubt want all cylinders firing. This should continue to provide a structural tailwind behind Chinese equities, the renminbi/yuan and bonds, which are all likely to continue to appreciate strongly this year.
The US is set up for a second-half comeback
A key risk for the US economy (if not necessarily US assets) in the early days of the new Biden-Harris administration would be the declaration of a nationwide lockdown – one that arguably should have occurred a year ago. This could see further outperformance of tech and growth stocks that have done so well already during the pandemic, while “the world reopening” themed baskets (linked to improvement in the Misery Index) take a tactical breather before continuing their re-rating higher later this year.
The most important macro event of 1Q probably took place in early January. No, not the storming of Capitol Hill by Trump supporters, nor even Trump being permanently expunged from Twitter for inciting violence and false narratives, nor even the successful transition of power to the new POTUS. Rather, it was the result of the two Georgia Senate runoff elections, giving the Democrats control of the US Senate by the slimmest of margins and thus at least a weak Blue Wave that was anticipated to be rather stronger before the 2020 election. With the Senate now at 50-50, Harris as VP is the tiebreaker, and the path to more generous fiscal stimulus is that much easier.
There is likely a cap on how high treasury yields can go in the short term, given the combination of debt in the system that is only set to increase on both the Fed’s and government’s balance sheet – not to mention that we’ll have the Empress of Doves, the pioneering Janet Yellen, as the new US Treasury Secretary.
There are trading opportunities – the modest Blue Wave and crypto…
There are still a number of investment themes with tailwinds: UK Assets (especially equities), the equity energy complex (from the XLE energy ETF to blue chip majors) and eventually the reopening sectors – think transportation, tourism, hospitality (Peter Garnry’s ‘Misery Index’).
It may seem like travel and holidays are light years away, and yet starting from this summer the world is likely to embark on the biggest tourism and travel binge ever experienced, and one that could run for years. Those that used to travel have not been able to and have saved up. And those that generally don’t travel are tired of being cooped up at home or in their local environs.
We continue to expect asset class inflation across the board, driven by modern monetary theory (MMT) and the social stability agenda, plus the climate crisis and infrastructure investment focus which is set to run for years. Structural trends continue to push the US Dollar lower, while volatility is generally higher and, at some point again, we expect higher long yields, especially in the US. At the end of the day, the US cannot spend to infinity and have the market freely price their yields, while expecting to not to go bankrupt. Whether that ceiling is 1.50% on US 10s or 2.00% on US 30s remains to be seen.
An interesting development is that inflation and loss of faith in fiat money could make Bitcoin and crypto currencies winners in Q1 and for the balance of 2021. We entered a new bull market that kicked off on December 16th when Bitcoin punched through the $20,000 high seen in 2017, sending a signal that unlike 2017, this time institutional investors and big hedge funds are willing to wager that crypto is a real asset.
We need to warn that it’s still early days for crypto, with the only certainty being volatility and plenty of divergent views on the space, as well as the overhang of regulatory risk.
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.