At the beginning of the Asian decade

E.The end of the extraordinary year 2020 is drawing to a close – the “annus horribilis” is what Tillman Galler, international market strategist at JP Morgan AM, calls it. 2021 is just around the corner, the year that will be marked by the withdrawal of the pandemic – a weak start because of the second wave and then a strong finish towards the end of the year, with growth above trend, says Galler.

This strong end of the year will then also bring about a revival of inflation, in America and Great Britain this could reach 2 percent. The fund company Blackrock also warns: historical experience suggests that inflation risks are highest when the belief is generally accepted that it will remain low. And capital market strategist Felix Herrmann lists reasons: For example, higher production costs are to be expected, because in the future companies will place more value on the resilience than the efficiency of their supply chains and, for example, could relocate production closer to their markets. In addition, the corona crisis has strengthened strong companies, which could then enforce higher margins and, last but not least, permanent requirements from the pandemic caused higher costs.

Galler and Herrmann agree that the crucial difference to the past is that interest rates will not rise. “The central banks have become reactive instead of proactive,” says Galler. According to the new goals of the central bank, inflation in America must first averaged more than 2.4 percent for three years before there is a need for action. And finally that suits politics. It is similar to the post-war period. There, too, the debts were high and negative real interest rates made them grow out of them.

China as the new superpower

For this reason, inflation is basically not a problem for the bond market, says Herrmann. But they are not a fan of government bonds from developed countries, they are strategically underweighted in them. The yields on these bonds would be close to an imaginary lower limit and could therefore serve far less than before as stabilizers in a portfolio. If so, priority should be given to inflation-linked bonds.

The two big banks agree not only on their interest rate outlook, but also on their regional perspective. “Experience has shown that a crisis always leads to a change of favorites,” says Galler. After the technology bubble, preference was given to emerging countries and Europe, after the financial crisis to America, and now the Asian decade is coming. Galler attributes this to the loss of ordinary income as a result of the lowest nominal interest rates, but also sees structural growth trends at work. For example, sales on the Chinese shopping day “Singles day” have been greater since 2018 than on all typical American shopping days Thanksgiving or Black Friday combined, meanwhile by around half. Last but not least, China and other Asian countries have so far managed the pandemic better. Blackrock chief economist Martin Lück also shares the same horn and speaks of a new investment regime. In the future, China will no longer be an emerging country, but a hybrid between developed and emerging market. Its importance as a source of supply will decrease, but it will remain important as a sales market. In the future, two superpowers can be expected economically and politically. Accordingly, they will overweight China and Asia except Japan.

A weaker dollar will also help the emerging markets. The bull market is coming to an end, says Galler. The American currency has been fundamentally overvalued for a long time, but now a longer-term lower interest rate differential speaks against it.

Skepticism for Europe

Both houses are skeptical about Europe. The profit expectations speak for the continent, says Galler, but he has the great talent to still shoot himself in the foot, says the market strategist and refers to the conflicts with Poland and Hungary and not least the Brexit. Lück is even more pessimistic. In the short term, European stocks performed better, but Lück believes this is short-lived optimism, not least because the impetus comes from the return to value stocks and cyclical stocks. In Europe in particular, value stocks can often be found in less sought-after industries that are subject to massive structural change, such as automobile production. And cyclicals did well in the early stages of a recovery, but they are over quickly and easily missed. On top of that, Lück points out that it is no longer possible to distinguish so clearly between growth and value stocks. Nevertheless, this cannot be completely disregarded, insofar as his attitude is a clear “no, but”. Strategically, Lück sees the industries drifting apart, among which technology, entertainment, delivery services, e-commerce and health will continue to be among the winners in the future.


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