The analysis and forecasts by Antonio Cesarano, Chief Global Strategist, Intermonte SIM
The end of the year is leading to some important ideas for imagining the themes that could characterize the coming year.
The general consensus is very compact this year: optimistic on the targets on the equity markets (up to + 20/30% on the S & P500), against a marked depreciation of the dollar (Bloomberg consensus eurusd 1.23 at the end of 2021) and average rates expected to gradually rise (1.25% target on the 10-year US Treasury based on the Bloomberg consensus at the end of 2021).
Let's try to grasp some indications that the end of the year provides us to arrive briefly at a comparison on the points of potential deviation from the current consensus.
I state that 2021 is envisioned as a year in which fiscal policies will probably be the protagonists while monetary policies will always be fundamental, but will take on a more supporting role, i.e. intervening in moments of greatest turbulence to reassure the markets and give time to fiscal policies. to express their impacts. A little bit what we hope will also be the evolution of the health issue in perspective: vaccines protagonists, but flanked by the important role of treatments (monoclonals, drugs, etc.) called to reduce the impact of the virus while waiting for the impact of vaccines reaching full capacity.
THE NEXT GENERATION EU AND THE BIDEN PLAN
In the fiscal policy area, an important role will be played, on the one hand, by the implementation of the Next Generation Eu and on the other by the Biden plan. The Biden plan is based on a few key points:
- it is aimed only at companies (especially medium / small US or foreign) that produce and generate employment in the US;
- it also includes green themes.
Below is a summary table of the plan which could reach over $ 2000 billion over 4 years. Much will obviously depend on Biden's strength, that is, if he will manage to snatch the majority in the Senate and on this we will have to wait for the ballot in Georgia on January 5.
The green theme therefore presents itself as a transversal theme, given that both Europe, the US and China intend to achieve net zero emissions by 2050/2060. As part of the Next generation EU, at least 37% of each national recovery plan must be dedicated to the green transition.
Another theme of 2021 will be digitalization, including among other things the € 750 billion of the Next Gen Eu: at least 20% of the individual national recovery plans must be dedicated to this item. In a more digital world, also stimulated by the global pandemic, a very important non-secondary issue immediately opens up, namely that of cybersecurity, also in light of the fact that commercial tensions could still partly continue even with the administration Biden and also manifest itself through cyber attacks, as happened in recent weeks. Biden could lead to a more multilateral approach in negotiations (no longer the US against all) especially with China, through a coalition of countries, probably including Europe. This, however, could still lead to some friction.
Finally, another important issue is that of the electric, which sees batteries as a crucial variable. It is no coincidence that Reuters indiscretions on Apple's iCar project by 2024 also refer to the development of a proprietary technology on batteries, Tesla's real competitive advantage together with its strategic role in the field of space travel.
So a very interesting year to engage with the upcoming full-bodied fiscal policies. Summarizing:
- Global Clean Energy
- Even better if they are small and medium-sized companies operating in the US (therefore also foreign companies as long as they produce goods and employment in the US and even better if with a female CEO). In summary, the Russell 2000 index preferred over the S & P500 index
In order of time, the US appears to have an advantage since it is likely to imagine that the new plans will arrive during the elusive first 100 days and therefore by April / May. The Next Generation Eu, on the other hand, will begin to be operational in the second half of 2021, apart from the advance share of 13%. Meanwhile, the driving force of the strong credit infusion from the Chinese side could lead to robust Chinese growth for most of next year, impacting other sectors such as industrial metals and oil (China is the world's largest importer).
On the pandemic front, times could prove to be longer also following the recent mutation of the virus. The timing is following very closely what happened for the Spanish of 1918 with similar recommendations for the population. The difference is above all in today's technology: in 1918 viruses were not known also because the electron microscope had not yet been invented. The CEO of Biontech (i.e. the German company that together with Pfizer developed the related vaccine based on messenger RNA technology) stated that the virus mutation is unlikely to impact the effectiveness of the vaccine, but we will know for sure in a moment. couple of weeks. The AD himself added that if efficacy problems should emerge, a modification of the vaccine could be prepared in about 6 weeks to which the technical times of accelerated trials and relative approval by the competent authorities could then be added. In summary, it would be a quarter of a delay compared to the schedule currently estimated above all by the US, ie the hypothesis that by the second quarter a good portion of the population will be vaccinated. All this suggests that the light remains at the end of the tunnel (the vaccine), but perhaps the tunnel could be a little longer.
We come to the dollar. The consensus imagines a strong depreciation based mainly on an assumption: the strong US debt will be financed with strong support also from the Fed and in any case the strong US public spending will amplify the already record level of the so-called twin deficits (balance sheet + trade) today at around 18 % of GDP. In addition to this, there is the ongoing trend of greater diversification of the foreign exchange reserves of central banks from dollar to euro. This factor could have been one of the causes of the strong depreciation of the dollar at the end of 2020 (alas led by the mistake I made by underestimating this factor … but the errors are used to correct themselves in time), caused by the marked interventionism of central banks, especially Asian ones. These interventions are aimed at preventing / curbing the excessive appreciation of local currencies and therefore consist of purchases of dollars and sale of local currency. Part of the dollars forfeited is then converted into euros, benefiting from the fact that there is now the tool to be able to invest in euros through the first forms of joint bonds such as the case of the social bonds of the SURE plan. It is no coincidence that in several of these issues the central banks of the world represented a significant portion (almost up to about 40%) of the subscribers.
Consequently, in order to formulate the 2021 scenario, it is necessary to reconcile the impact of the opposing forces: on the one hand, twin deficits and rebalancing of the foreign exchange reserves of world central banks (in favor of USD depreciation) and on the other hand the possible strong inflow of capital. towards the US especially during the second quarter in view of the substantial plans of the Biden / Yellen administration (in favor of dollar appreciation).
Obviously these are not the only factors at play, but they could be the most important ones. The typical rate differential could be less significant due to the thaumaturgical / anesthetic role of central banks on rates which have partially reduced their reporting value. Another factor is the use of the currency for the funding of carry trades but, as the end of 2021 taught, the impact differs depending on the target market of the investments. In November, the greater focus on euro equities entailed the use of the euro as the funding currency for carry, but with a prevalent destination for assets denominated in euro. The result was that the euro appreciated.
For the reasons mentioned above (the wait for the Biden plan), in the second quarter there could instead be a greater preference for assets in USD, thus leading in this case to a depreciation of the euro (loan in euro to take advantage of low rates, conversion of euros in USD to be able to buy assets in USD). In summary, the eurusd in the first half of 2021 could move in the 1.18 / 1.25 range with a trend towards the high part in the first few days of January and then gradually retreat towards the low part of the range by June.
A final mention of the spread: in the first two months of the year there are no maturities of Italian medium / long-term securities and typically in the first quarter the MEF issues new bonds. Theoretically, the increase in the offer in the absence of deadlines to be renewed could negatively affect the spread and rate. Past experience, however, teaches that the spread often marks the lows of the year in the first three months of the year. This is because in a context of BTPs much above par and in a context of very low rates on a global scale, operators perceive the new issues on the medium-long segment to be particularly interesting both for the interest rate theme and for the price theme around par. it increases the attractiveness of those who book securities at amortized cost such as banks. These technical factors together with the scarcity of yield on a global scale could bring the spread even below 100bps in the first three months of 2021.
In summary, the ideal portfolio at this stage sees the bond component consisting of:
- Long-term BTP to add
- US corporate securities (IG and non-IG) also not with hedged exchange rates to take advantage of the Fed support that will not fail in 2021 on this type of asset
- Emerging country bonds in local currency: Biden will have a softer trade policy, although not necessarily free of friction, especially with China.
On the equity front, focus on the following topics:
- US infrastructure / mid small cap
- global clean energy (which is also linked to the ESG theme)
Several European / Italian companies are also linked to these issues. The recovery fund theme could come into focus at the end of the half-year, when there could also be a pause in the markets in view of the summer that could reduce the perception of the impact of the virus. Alongside this, the addition of Chinese equities could be advantageous (the new five-year plan starts from February and China is managing to control the pandemic), but making sure that these are mainly class A shares.
As you can see with respect to the consensus, the main points of departure are: optimism yes, but not in a linear way as the tunnel could be longer than expected. Furthermore, the dollar may not depreciate linearly, but only at certain times of the year, particularly more at the beginning of the year than during the second half of the year.
As a good Neapolitan there would be signs of optimism: 2021 will not be a leap and above all … it will only have two Friday 17th compared to 3 Friday in 2020.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/mercati-2021-previsioni/ on Fri, 01 Jan 2021 07:10:15 +0000.