Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
New Year Party in Full Swing
Summary: With little change from the final trading days of 2020, stocks in Asia trade hold near all-time highs on first trading day of 2021.
The S&P 500 and the DJIA closed 2020 at all-time highs. With little change from the final trading days of 2020, stocks in Asia trade hold near all-time highs on first trading day of 2021. This as stimulus spending and vaccine rollouts bolster fears surrounding record virus cases across the globe and tough lockdown measures as the COVID-19 pandemic shows no signs of slowing.
There is little change in our overarching view of late 2020 that emerging markets, commodities and bets on higher inflation (base effects, pent up demand and supply crunches) are the place to be. Alongside a shift in market leadership toward more cyclically orientated stocks, sectors (energy, materials, industrials, financials etc.), and geographies with 2020’s highflyers hampered by rising long end yields.
These trends continue to hit their stride as trading for the new year resumes, with the US dollar sliding and gold, stocks and bitcoin climbing to kick off the year – momentum is strong, valuations mean little and exuberance is abound as various risk assets ascend into the stratosphere – it’s a momentum world out there. Gold hitting a 2-month high, bitcoin surging through US$34,000 and in Asia trade today the Yuan rising and Kospi hitting its highest level in more than 5 years, as investors continue to pile into risky assets backed by the premise of ongoing central bank intervention, further fiscal stimulus and vaccine rollouts. Relentless USD weakness adding fuel to the risk asset fire, commodities, hard assets and cryptocurrencies in particular reveling in the broad USD weakness.
New Year party aside, on the horizon, the two Georgia runoff elections on Jan. 5 will determine which party controls the Senate, and the interplay between the pandemic spread and tighter restrictions vs. the vaccine rollout will be catalysts to test exuberance through the coming weeks. However, despite the euphoria and froth visible on the surface, CFTC positioning continues to show investors holding onto hedges, with the “wall of worry” being climbed finding room for further upside, sustaining "reflation trade” gains as economic recoveries resume into Q1. Particularly against the backdrop of more fiscal stimulus and free flowing central bank liquidity.Latest Market Insights
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