A positive outlook for risk assets in 2021?
Talib Sheikh, Head of Strategy, Multi-Asset, says he is relatively optimistic that the global economic expansion has further to go. The most interesting market trend of late has been the lack of price action in the bond market. US real yields have declined from 96 basis points a year ago to -110 basis points currently. Cash and real interest rates are firmly negative – and that is the intent of policy makers, he said.

However, GDP growth globally and in the US, forecast this year at around 4% and above 5% respectively, is above trend and personal income and savings rates also are high, he said. This implies there is some risk of inflation and raises the question of whether the Fed will soon be forced to blink and change its accommodative policy. Talib thinks the market will test the Fed, but the Fed will hold course.

This provides a positive backdrop for risk assets based on incredibly loose central bank policy and accelerating global economic growth, he said. The weaker US dollar and coordinated global expansion can make risk assets in the rest of world increasingly more attractive relative to the US.
UK to remain in holding pattern for Q1
Although the UK has now secured a deal with the EU and sterling has strengthened a little, it is nowhere near its pre-referendum levels against either the dollar or the euro, said Richard Buxton, Fund Manager. Indeed, much of its recent strength is more a reflection of dollar weakness. This suggests there has been no immediate rush from global investors en masse to rebuild their UK weightings as they await the economic effects of a third lockdown across Q1. This has not stopped individual overseas buyers from fishing in UK waters – on the first trading day of the New Year a large UK online gaming business received an offer from its US joint venture partner. The board rejected the offer, and rightly so in Richard’s view, as the business could be worth substantially more in a year’s time.

Despite the current infection wave, the UK equity market is prepared to look across the valley to better times while keeping a close eye on the progress of the vaccine rollout. There are encouraging signs. A UK bellwether retailer announced its assumption that its stores would be shut for the next three months and the shares rose around eight percent. Nationwide reported a 7.5 percent annual rise in house prices in 2020 – a much better outcome than anticipated, as demand for residential property remained buoyant. Domestic plays such as housebuilders and construction will remain exempt from lockdown restrictions while a rise in transactions and mortgage approvals in December suggests people are confident enough to proceed even if they miss the end of the stamp duty window currently pencilled in for March, although that is easily extendable.

If every cloud has a silver lining, then the current one is that this longest lockdown to date means the risk of any premature fiscal tightening by Chancellor Sunak is completely off the agenda. In Richard’s view this can only be a benefit to domestic UK businesses.
Siren song lures investors away from gold and silver
The coming year could see silver soar as real interest rates continue to fall, while the potential for a global systemic reset is higher many may think, said Ned Naylor-Leyland, Fund Manager, Gold & Silver. Concepts like ‘debt jubilees’ (wiping out debts) may sound radical to our modern ears, but in his view the G20 is increasingly pressured to come up with solutions for the enormous problems the world is currently facing.

Ned also sees potential for another financial crisis in 2021. Although many in the market are optimistic that the vaccines can spur reflation, Ned pointed out the Bank for International Settlements (BIS) warned in December that economies are transitioning from a liquidity crisis phase to an insolvency phase. In Ned’s view, it’s not a question of whether there is an insolvency crisis, but when and for how long.

Ned said we’re seeing the complete inverse of the situation when Paul Volcker became chair of the Federal Reserve in 1979 and tamed runaway inflation by hiking real interest rates, partly to bring the gold price down. While Volcker used tight monetary policy to supress inflation, Jerome Powell is using loose monetary policy to try and stoke inflation. With ever lower interest rates and eternal QE, Powell is holding back a wave of defaults and a full-blown financial crisis, like Moses parting the Red Sea. Against this backdrop, Ned says real interest rates should continue to fall, which is why he believes gold and silver will remain key stores of value. He sees the recent risk rally as akin to sirens luring investors out of monetary metals and back onto the rocks at precisely the wrong moment.

Ned is particularly bullish on silver, as well as gold and silver equity miners. A number of investment banks are expecting the silver spot price to rise to anywhere between $50-$200 per ounce this year given its use in Green Deal technology, as well as being a beneficiary of falling real interest rates. In Ned’s view, silver is due a rerun of its performance in 2011. Meanwhile, gold and silver equity miners are seeing increased M&A and are benefiting from rising earnings and expanding margins thanks to higher spot prices.
Taiwan leads the way in Asia

Following a strong run of performance towards the end of 2020, Asian markets should remain well placed in 2021, said Jason Pidcock, Head of Strategy, Asian Income. Markets have been supported by a combination of factors including a weaker US dollar and optimism about Covid vaccines, despite cases rising in Asia as they have across the rest of the world. China recently approved a domestic vaccine, and it won’t be long before vaccines are deployed throughout the region.
Taiwan has been an absolute standout recently, said Jason. There have only been seven Covid-related deaths there in total to date, and the Taiwanese market has been hitting all-time highs. The market is dominated by the tech sector – Taiwan’s largest companies are all tech companies – and many of these are genuine world leaders.

In Jason’s view, Taiwan is set to benefit greatly from a move towards electrification of industries. In the auto industry, for example, as we move from the internal combustion engine to electric vehicles (EVs), there will be greater levels of outsourcing and Taiwanese companies will be at the forefront, said Jason. Many large tech companies in Taiwan are in net cash positions, and some are still trading at very low P/Es, despite offering attractive dividend yields and having strong earnings growth forecasts. Furthermore, these tech companies are generally in the hardware sector as opposed to the software sector – Jason said the former now benefits from higher barriers to entry. The same can be said for big tech names in South Korea, too.

Jason remains very optimistic about the outlook for the Asia Pacific region. Following a period of more challenging market conditions, he believes that Asian equity income investors have much to be optimistic about this year.

Little reward for Japan’s Covid success
There are two market preoccupations in Japan at the moment, in common with much of the world, and those are Covid-19 and the disparity between Value and Growth, said Dan Carter, Fund Manager. Japan has fared well during the pandemic from a public health perspective, with a cumulative total of 3,509 deaths so far according to John Hopkins University, an order of magnitude lower than many other places in the world. However, on a macroeconomic basis Dan can’t really say that the relative success with the virus has made much of a difference for Japan – the market and economic impacts of the pandemic are global and Japan can’t be entirely insulated from them.

The more impactful issue for Japan has been the dispersion in returns between Value and Growth sectors, where the late-2020 Value reversal in other parts of the world wasn’t really seen in Japan. That could be related to the currency, says Dan, because the one area where a better experience with Covid has affected Japan is in the strength of the yen, and that would have a negative impact on some Value-focused companies. There’s also the factor that Japan is more cyclical and less tech-focused than some other markets.

Nowhere has the dispersion between Growth and Value been seen more keenly in Japan than in the IPO market. December saw a strong IPO market, with some stocks Dan was looking at coming to market with fairly high valuations but nevertheless still performing extremely well in the early weeks of trading. Dan doesn’t see this as purely irrational exuberance, but there has been a late adoption of digitisation by both consumers and corporates in Japan, and so the total addressable market for some of these business still provides plenty of room for growth.

Please note

Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing, are not necessarily those of Jupiter as a whole, and may be subject to change. This is particularly true during periods of rapidly changing market circumstances.

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