3Q21 Top five investment takeaways | Bahasa

Indonesia, 01 Jul 2021 -

1. Equities: Taper, but no tantrums

 It is becoming a tug of war of views between the Federal Reserve and the market on whether a “Fed Taper” is imminent during the second half of the year. We believe concerns around the Fed’s monetary tightening will dominate the narratives in the coming months, giving rise to high market volatility.

Given (i) similarities in macro conditions today and conditions prior to the “taper tantrum” of  2013; and (ii) the huge time lapse between taper talk and actual rate hike in the previous cycle,  we believe that a Fed taper cannot be ruled out should inflation expectations approach the 3%  mark. It is therefore prudent for portfolio allocators to position for this eventuality.

However, unlike in 2013, we believe there will be tapering but no tantrums. Any Fed taper or cutting back on its asset purchase programme on the back of a recovering economy is not negative for equities since rising corporate earnings from a stronger economy will be highly supportive.

2. Our key asset allocation decisions are:

• Overweight equities relative to bonds. Vaccination rollout and macroeconomic recovery will continue to drive outperformance of equities over bonds. From a cross assets perspective, we keep our preference for equities over bonds. 2021 will be a year of recovery for the global economy. Momentum wise, however, we believe that the macro rebound for the US, Japan, and Asia ex-Japan has peaked for now and some moderation is on the cards. Growth momentum for Europe, meanwhile, appears promising in the coming quarter given its success on the vaccination front.

• Upgrade Europe, downgrade Asia ex-Japan. Within Developed Markets (DM), we have turned marginally positive on Europe equities. Recent data suggest Europe has caught up with vaccination rates and economy reopening. The economic surprise numbers from Europe is now coming in better than the US/Japan combined and underlines the momentum in the region’s recovery. The European market is also a geared beneficiary of vaccine discovery, with heavy concentration of “traditional” sectors of Financials, Industrials, and Materials. These sectors are poised to undergo stronger recovery in a post-pandemic world.

• Prefer DM to EM. Fed tightening concerns will likely a drag on Emerging Markets (EM). The region’s huge dependence on external funding and dollar funding are especially vulnerable to rising US Treasury yields. Moreover, unlike the developed economies which have managed to keep the pandemic under control, EMs are experiencing sudden spikes in new cases, which will restrain the latter’s attempt to return to normalcy.

3. Autonomous Vehicles / EVs:

With advancements in technology and a changing regulatory landscape, Electric Vehicles (EV) are poised to overtake Internal Combustion Engine Vehicles (ICEV) as the automobile of choice in the next century. The electrification of the transportation industry is underpinned by (a) Technological advancements leading to lower pricing; (b) Changing regulatory landscape; and (c) Shifting consumer sentiments. EVs are expected to reach cost parity with ICEVs by end of the decade, with EV sales accounting for 58% of new car sales by 2040 (up from 2.7% in 2020). The transition of the transportation industry to EVs and AVs would benefit automakers, battery manufacturers, charging infrastructure providers, and chipset manufactures.

4. Income equities as alternative to bonds

The hunt for yield is on in this environment of low interest rates. China Banks and S-REITs have proven to be attractive dividend plays, playing a crucial role in the income end of the Barbell Strategy. China Financials demonstrated sturdy share price performance as 2020 drew to a close, and S-REITs offers one of the world’s highest dividend yields at 5%. 

5. Robust commodity outlook amid rising demand

Most commodities – metals, energy, and agriculture – endured a difficult time in 2020 given Covid-19 lockdowns and the consequent plunge in economic activities. But a spectacular rally in commodity prices has taken hold since late-2020, and could well continue into 2021. The  driving factors are: 1) Ongoing global recovery in 2021 drove commodities demand sharply  higher to return close to pre-Covid levels, boosted by an early recovery in China and big  infrastructure spending in the US; 2) Expansionary monetary policies and fiscal stimulus  measures undertaken by governments around the world (especially the US) have boosted  inflation expectations and weakened the dollar; 3) Lingering supply challenges in certain  commodities owing to sporadic Covid-19 related restrictions, supply chain issues, and  weather events in certain areas.

While we could expect some moderation in commodity prices in 2H21 after the recent rally, average commodity prices in 2021 will end up significantly higher than in 2020. This obviously benefits the upstream commodity producers. But for the downstream consumer sectors, the outlook for margins may not be as dire as one would expect, as higher demand for end products ensures that some of these costs will be passed on to customers.

 

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