Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Summary: There are a number of potential tailwinds for a long-term bullish stance on UK assets.
Our Q3 focus is on the structural turning point for Europe, both politically in the landscapes of Germany, and potentially France. We’re also looking from a social, policy and long-term investment perspective on sustainability, climate crisis and ESG initiatives. Whilst some of the nuances between the core and peripherals of the eurozone may be lost to investors in Asia, sometimes it pays to keep a simple framework to take out the noise from the complex moving parts.
Let’s think of the European Union (EU) as a large conglomerate, made up of many different companies that are represented by countries. The likes of Germany and Sweden are companies predominantly focused on exports and industrials, whereas Spain and Greece would be skewed towards the service side of tourism and hospitality. The different economic models of these companies will lead to different needs at different times. This is the challenge behind an EU that is seemingly one on a monetary policy front, yet hugely fragmented on a fiscal and structural policy front.
In this analogy, the UK represents the spin-off of one of these companies from the EU conglomerate. Spin-offs give a company the ability to be laser focused on their own objectives and on fulfilling the needs of their stakeholders.
The case for being structurally bullish about UK assets, such as sterling, equities, property and businesses, naturally comes with several running risks.
With those risks in mind, there are a number of potential tailwinds for a long-term bullish stance on UK assets.
Whilst the US tech giants such as Facebook, Google and Microsoft are pretty close to their ATHs, their Chinese counterparts are anything but.
Names such as Alibaba HK$ 208, Tencent HK$ 608, Baidu HK$ 178, Weibo HK$ 48 and JD.Com HK$ 280, are off anything from -20% to -33% from recent ATHs. This is despite earnings being relatively strong across the China tech space, lower valuations than their US counterparts, the scarcity value of listed tech champions in Asia, the underlying domestic economic currents being sound, and a world that is slowly emerging from Covid fever and fatigue.
It’s worth noting that China’s monetary policy has been tighter than in the rest of the world and is likely to stay put in 2H21, with risks likely being towards some accommodation in the second half of the year.
On the other hand, we are almost certainly going to see a move towards tighter US fiscal policy in Q3/Q4, as the Fed starts the taper dance, embarking on a pathway to eventually being able to raise rates.
So relatively speaking, even if the PBOC does nothing, there should be more accommodation on China’s monetary policy than the US into year end. This should be conducive for China equities, in particular the lagging tech names, bonds, and probably the domestic leisure and travel industry.
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