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LONDON: Ditch the dollar! Buy emerging markets! Stay sustainable! These are among the consensus trades that investment banks and asset managers believe will dominate financial markets in 2021.
Hopefully, vaccines will make 2021 the year of recovery from the COVID-19 pandemic, which has disrupted some sectors and strengthened the dominance of others.
Here are five trades the world’s largest investment houses seem to agree on:
THE POWERFUL (DOLLAR) THAT FALLS
COVID-19 ended a decade of dollar strength, and expectations are that 2021 will bring more traps for the dollar.
BofA’s survey of investors in December showed that “shorting” the dollar was the second-busiest trade. Another indicator, data from the US Commodity Futures Trading Commission, shows $ 30 billion in net dollar shorts, ranging from last December’s $ 17 billion net long.
The rationale, says Peter Fitzgerald, director of multi-asset and macro investments at Aviva Investors, is that no central bank can “outperform the Fed.”
In other words, when the Federal Reserve cut interest rates near 0 percent, it eliminated the dollar’s yield advantage over its peers. And he still has room to relax the policy.
The imminent departure of President Donald Trump should also ease trade and political tensions, which were underpinning the dollar.
How much and for how long will the dollar fall? Analysts polled by Reuters predict that the weakness will last until mid-2021, limited by the uncertainty of COVID-19.
But asset manager PIMCO notes that the dollar falls faster after deep recessions, with five instances of annual depreciations of 8-10% recorded between 2003 and 2018.
Vaccines and recovering economies “will accelerate the fall of the dollar from grace,” predicted PIMCO.
RE-EMERGING MARKETS
As developing economies benefit from the recovery in world trade, tourism, and commodities, a weaker dollar, and a more predictable White House, Morgan Stanley’s message is: “I have to buy all emerging markets! “
It is recommending currencies from China, Mexico, Brazil, South Africa and Russia, along with bonds from Ukraine and the Mexican oil company Pemex. Rival banks Goldman Sachs and JPMorgan are also supporting emerging markets by 2021, and the BofA survey shows the sector to be the top favorite or “overweight.”
Debt in emerging market currencies will redound to 6.2% of investors next year, more than the S & P500, BofA expects.
The shift in sentiment toward a sector that languished for a decade is due, of course, to hopes for a China-led growth recovery, but also to the lure of higher emerging market interest rates, given 0%. or negative returns in the richest countries.
Emerging market currencies also have 25 percent undervaluation to recoup, estimates asset manager Pictet.
Data from the Institute of International Finance (IIF) shows that investors invest money in emerging market assets at the fastest rate in nearly a decade.
But some remain cautious. Higher Treasury yields could trigger a 2013-style “creeping tantrum”, Citi suggested. Investment grade credit ratings are at risk in some countries like Romania or Mexico, while more debt defaults are likely in weaker countries.
(CENTRAL) BANKING IN IT
Most bets support the view that the Federal Reserve, the European Central Bank, the Bank of Japan, the Bank of England and the People’s Bank of China will keep the money flowing cheap.
Central banks around the world have spent $ 1.3 billion an hour since March on asset purchases, calculates BofA. There were also 190 rate cuts in 2020, roughly four every five business days.
But given that global GDP is forecast to expand 5.4 percent next year, the most since 1973, it could be difficult to justify pushing the pedal harder, especially if inflation rises.
And anyway, there isn’t much room for politics. JPMorgan estimates that more than 80 percent of the wealthiest nations’ sovereign bonds pay negative returns after accounting for inflation. Many investors, including BlackRock, are now underweight in the sector.
Still, the Big Five’s asset purchases should total $ 3 trillion, Pictet strategist Steve Donze predicts, down from $ 8 trillion this year, but enough to keep bond yields extremely low. .
A note of caution from JPMorgan: Consensus forecasts over the past 10-15 years have correctly pinpointed the direction of Treasury yields only 40 percent of the time.
ESG: HERE FOREVER
The assets of mutual funds that adhere to environmental, social and governance (ESG) principles doubled last year to more than US $ 1.3 trillion, and the IIF predicts that the pace will accelerate in 2021, especially if the president-elect of the United States, Joe Biden, pursues a greener agenda.
Concerns about pollution, climate change and labor rights are the main drivers. But the IIF also notes that 80 percent of “sustainable” stock indices outperformed their non-ESG peers during the pandemic-linked selloff, while renewable energy has outperformed runaway since then.
BlackRock describes ESG as “the tectonic shift that transforms investment”, forecasting “persistent flows in sustainable assets in the long transition to a less carbon-intensive world.”
Two-thirds of ESG funds’ assets are in stocks, but sustainable debt has grown 20% in 2020 to more than $ 620 billion. Governments are stepping up green debt issuance, while central banks are considering more sustainable bond purchase and reserve strategies
BIDEN TIME ON TECH
Many of the investment strategies above are based on a very different approach to trade and geopolitics under Biden.
He has promised that the United States will be “ready to lead” again on the world stage, but BofA warns that China, North Korea or Iran may try to test him early on with “provocative actions.”
In some areas – big data, 5G, artificial intelligence, electric vehicles, robotics, and cybersecurity – Biden’s policies can be as combative as Trump’s. That can accelerate the movement towards what is called ‘splinternet’, with dual or multiple technology systems.
Technology and e-commerce companies account for nearly a quarter of US corporate earnings, while technology comprises 40 percent of MSCI’s emerging equity index. So check out this space.
