investment insights
Asia Investment Strategy H2 2021 – Global growth stabilisation and deceleration
In the second half of 2021, the global economy and financial markets should experience a slightly different dynamic from the one experienced over the first six months of the year.
Global growth should stabilise and even decelerate, as Europe’s acceleration will not make up for the US economy’s soft-landing (at a high level), and China slowing down further. With lower marginal gains expected from lower levels of social restrictions (and bumps in the road related to new variants) and lower policy stimulus than in 2021 H1, global GDP will remain strong but should not print the same extraordinary figures than over the last three months.
The enormous economic and financial distortions (between supply and demand, between manufacturing goods and services, between consumption in the West and China’s exports, between stocks and fixed income performances, between value/cyclical and growth quality securities’ returns…) triggered by the pandemic and the induced policy responses should start to ease and even to reverse in some cases.
Growth stabilisation/deceleration and fading economic distortions will progressively weigh on inflation pressures related data.
While the cyclical use of fiscal policy has been impressive over the last 15 months, most governments – even the US one – do not rely on a strong enough political consensus to permanently and substantially increase the level of government expenditures. Public investments are unlikely to close the savings gut that has widened further under the pandemic and continues to weigh on the equilibrium level of long-term interest rates.
The US’ apparent labour shortage should be mainly a temporary phenomenon. Moreover, the last decade demonstrated that even low participation rates did not foster higher wage inflation.
Even increasingly challenged by threats of international taxation or domestic regulations, large tech/web platforms should maintain a significant part of their monopolistic powers, continuing to compress the margins of their marketplaces’ participants and the pricing power of their human workforce.
Between the short-term dynamics and the medium-term landscape shaped by these structural forces, the role of central banks and in particular the Fed, will be key in driving inflation expectations and preventing real interest rates from rising again or rising too fast. From this perspective, the recent hawkish shift in tone from the FOMC (Federal Open Market Committee) while understandable from a risk management point of view - may have lowered the bar for a possible policy mistake and a self-fulfilling tightening in real financial conditions.
With this in mind, we recommend investors to adjust their portfolios for the second part of the year, slowly moving away from the best performing assets during the first six months of 2021 (industrial commodities, value and cyclical stocks) in favour of the secular winners from the pre-Covid-19 trends (growth and quality securities) or from the trends reinforced by the health and environmental crisis (sustainable companies or companies improving their own trajectories toward net zero carbon emissions). The relative asymmetric outlook for interest rates (low probability of significant rise, higher probability of greater decline) offers some space for credit to perform much better than during the first half of the year.
Watch our H2 Investment Outlook video here
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