House View, May 2021

Macroeconomy

With data showing global industrial production and international trade rising above pre-pandemic levels, we have decided to revise up our forecast for global GDP growth this year to 6.0% from 5.8%. We have adjusted higher our year-end Brent target to USD69.

We continue to expect solid GDP growth of the order of 6.5% in the US this year, with growth highest this quarter (when we expect it could reach 10% quarter-on-quarter). We believe the Fed will provide hints on tapering its monthly asset purchases later this year.

We expect a consumer-led rebound in Q2/Q3 to help the euro area economy towards 4.5% GDP growth this year. The Next Generation EU recovery fund, critical to the region’s prospects, will kick in over the coming months. Recovery in China remains solid, although recent data leads us to tweak our 2021 GDP growth forecast to 9.2% (from 9.3%).

Currencies

We have a favourable view of the Norwegian krone and Canadian dollar, both cyclical currencies. They should be helped by two of the most hawkish central banks in the developed world even more than by commodity prices, with the Norges Bank signalling a rate hike in H2 22 and the Bank of Canada trimming its promise on keeping rates unchanged. Among emerging currencies, the Russian ruble looks attractive.

Asset Allocation

We remain neutral on developed-market equities, but have turned tactically more cautious on US equities after their strong rise. We continue to see opportunity in other areas such as the UK and Japan and have raised our tactical stance on the defensive Swiss market to neutral. The climate is ripe for rigorous stock picking, with one of our main focuses on companies with pricing power and strong balance sheets.

Covid-19 concerns and brightening prospects elsewhere have hurt the relative attractiveness of emerging-market assets, including local-currency EM government bonds, on which we are underweight. However, we are initiating separate coverage of Chinese government bonds with an overweight position to reflect strong policy discipline, attractive yields and our favourable view of the yuan. We are overweight hedge funds, seeing them as an important diversifier.

Equities

While full-year earnings forecasts for the S&P 500 are being revised higher after even better-than-expected Q1 earnings, the fallout from proposals to raise taxes should not be ignored. Having lagged, we believe earnings should gain momentum in Europe and we see potential for Swiss equities to catch up on other markets in the short term.

The overall economic backdrop continues to support emerging market (EM) equities, but pandemic concerns continue to swirl around places like India and Brazil. With possible exceptions, we cannot see EM markets outshining their developed-market peers at this stage. ​​​​​​​

Financial conditions are progressively improving for energy stocks while we expect European financials to perk up in the wake of strong earnings numbers from the US banking sector in Q1. The short-term outlook for European industrial stocks looks somewhat mixed given significant valuation premiums.

Hedge Funds

We believe a number of hedge fund strategies (global macro, equity, distressed credit) will be able to exploit growing rate and currency volatility as economic divergence becomes increasingly evident. Activist strategies should also benefit from a wave of corporate restructurings and M&A.

Fixed Income​​​​​​​

We have decided to raise your year-end target for the Bund yield to zero from -0.2% as the European economy recovers. We could see the ECB start to gradually reduce its asset purchases in Q3.

We see limited room for further spread compression in credit markets, with the carry component of corporate bonds set to become more important for returns. We like ‘rising stars’ (high-yield bonds set to be upgraded to investment grade).