Macro Economic Outlook and investment strategy

Investment Strategy

KEY HIGHLIGHTS

Adopt a constructive view on risk assets with the global economy on the mend.

Overweight equities over cash; Neutral on both fixed income and alternatives.

Focus on secular growth trends and sustainable investing.

With the global economy on the mend, we hold a constructive view on the investment outlook given the post-pandemic recovery and accommodative stance by global central banks. As such, we prefer to overweight equities over cash while advocating a neutral stance on both fixed income and alternatives.

We are positive on overall equities but believe some markets and sectors could do better than others given the still uneven recovery. In addition, we believe earnings growth will be the key driver for equity returns this year. Notably, MSCI All-Country (AC) World earnings are projected to rebound 26% in 2021 (versus -8% in 2020). As such, it should more than offset any potential de-rating of the valuation multiple, which has expanded significantly in 2019 and 2020.

Markets wise, we favour the U.S., China, and South Korea as these markets are well-positioned to outperform global peers. In particular, they stand to benefit from their significant exposure to technology-related sectors that will continue to do well with support from secular growth trends such as digital consumption and cloud computing. No doubt, the widespread implementation of a COVID-19 vaccine would lead to a broader recovery and benefit selected cyclical stocks. However, it will unlikely lead to a sustained rotation away from the technology plays in the post-pandemic era.

We are neutral on fixed income but expect credits to outperform government bonds from a total return perspective. While there are still concerns on rising bankruptcies and credit defaults, the negatives are largely priced-in. In fact, the improving economy should lead to tighter credit spreads and enhance price returns. In particular, we favour both Investment Grade (IG) and High Yield (HY) credits in Asia given the relatively resilient fundamentals and attractive carry. In contrast, sovereigns bonds, in particular U.S. Treasuries, may struggle to deliver positive returns with the 10-year UST yield expected to grind higher to 1.0% - 1.5%.

As for alternatives, we have a neutral stance on both gold and oil. We continue to advocate holding gold as a portfolio diversifier even though the extent of price appreciation may be more moderated in 2021. Separately, the worst may have passed for oil although we expect prices to remain subdued given the still challenging demand-supply dynamics.

Although our asset allocation suggests a pro-risk stance, it is imperative for investors to maintain a well-diversified portfolio in view of the many growth uncertainties. Last but not least, the growing emphasis on sustainable development, especially in a post-pandemic world, could lead to increased opportunities in relevant investments across asset classes including equities and fixed income. By investing with a sustainable focus, it should also help to enhance overall portfolio performance over time.

Dissecting drivers of global equity returns

Sources: Bloomberg, Maybank Group Wealth Management Research I November 2020

Previous
Next