Global View - J. Safra Sarasin E-Services
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Global View 2nd Quarter 2021
Cover: Golden Gate Bridge, San Francisco, United States
Contents
Foreword
What could possibly derail the upswing? 3
Economic Outlook
The return of inflation 5
Forex Strategy
More euro gains expected 9
Fixed Income Strategy
Higher volatility ahead 11
Equity Strategy
A rising, yet bumpy path ahead 15
Sustainability Focus
The World’s Carbon Budget and what it means for investors 19
Asset Allocation
Sustainable recovery 22
Market & Forecast Overview 24
Contacts 27
Foreword
Foreword
What could possibly derail the
upswing?
Dear reader nature. More than half of the global gross do-
mestic product, i.e. a total of 44 trillion USD,
As I address you this year from the renewed is partly or highly dependent on nature and its
lockdown, one thing is already clear: things resources. Agriculture, forestry, the food in-
can only get better. And indeed, the year 2021 dustry, wood processing, the construction
is set to unfold positive developments on all sector and hydropower are highly exposed to
fronts. Vaccination campaigns are in full swing biodiversity losses, including their supply
worldwide. Monetary and fiscal policies con- chains.
tinue to cushion the economic impact. Indica-
tors from industry show a cyclical upswing. Fi- A UN report shows the extent of the ongoing
nancial markets are poised to reach new value destruction. While from 1992 to 2014
highs. What could still threaten growth? the value of real capital from machinery to
buildings doubled and the number of workers
Even if we remain optimistic that this upswing increased by 13%, the value of natural capital
should continue, a little pensiveness cannot decreased by 40%. Since 1970, the number of
hurt. Just in time, the British government has vertebrates has fallen by 60%. From 1997 to
published a groundbreaking report that is an 2011, it is estimated that up to 20 trillion USD
important wake-up call: the “Dasgupta Re- per year of ecosystem functions were lost
view”, named after its author, the economics worldwide. For economists, it is clear that a
professor Partha Dasgupta. It is the most com- radical rethink is needed to support growth in
prehensive contribution to the debate on the the long term. For investors it is obvious: with-
sources of growth to date and could provoke a out (natural) capital, there will be no sustaina-
rethink in economics. ble return.
According to the traditional reading, the
sources of growth are attributed to the produc-
tion factors labour and capital. By combining
these two factors of production and increasing
efficiency through continuous technical pro-
gress, growth is explained and an unlimited
upward trend - apart from a few cyclical fluctu-
ations - is promised. However, as Professor
Dasgupta points out, this model has a prob-
lem. It overlooks an important factor of pro-
duction that is central to the delivery of eco- Best wishes,
nomic services: nature or, in economists' jar-
gon, “natural capital”.
According to a study by Cambridge University, Dr. Jan Amrit Poser
economic activity is massively dependent on Chief Strategist & Head Sustainability
Global View | 3
Barcolana sailing regatta, Trieste, Italy
Economic Outlook
Economic Outlook
The return of inflation
Inflation will be bumpy this year. The key question for investors is whether it will trend higher over
the next few years. We think it will, as the huge amount of policy support will only be removed
very gradually. Over the longer term, structural factors such as ageing are likely to play a greater
role, too. A build-up in underlying inflationary pressures towards the end of the year could prompt
investors to second guess the Fed’s intention to keep policy very loose. Good and consistent com-
munication from its members will be key to ensure that real yields increase only gradually.
Inflation is coming back on investors’ radars. Official estimates made by the Congres-
Commodity prices have increased sharply sional Budget Office imply that the output
over the last several months and emerging gap – the difference between what the
bottlenecks across supply chains should economy is capable of producing and what
cause producer prices to rise more rapidly it actually is producing – is around 3% of
over the next few months. Still, recent com- GDP. The combined fiscal packages will inject
ments by Janet Yellen and Jay Powell indi- an average of something close to $300bn per
cate that policy support will remain ample month into the economy through the end of
for the time being. Indeed, for the new US September, against an estimated monthly
Treasury secretary, “the smartest thing we output gap of $80bn. So if the demand for
can do now is act big”. And according to the goods and services exceeds supply, prices
Fed Chairman, monetary policy will have to should go up. But how much will prices rise?
remain “patiently accommodative”. And how sustained will the increase in infla-
tion be? To answer these questions, we
Producer prices are on the rise need to distinguish between short-term and
longer-term dynamics.
US fiscal policy will inject
around $300bn per month
into the economy throughout
the end of September against
an estimated monthly output
gap of $80bn. Too much
money chasing too few goods
should be inflationary
Source: Macrobond, J. Safra Sarasin, 19.02.2021 This year, it’s all about the base
Over the next several months, large positive
Democrats in Congress are moving ahead base effects will shape advanced econo-
with the American Rescue Plan. The even- mies’ inflation profiles. The sharp increase
tual package is likely to be very large and in commodity prices will directly feed
worth around $1.5-1.7tn. This, combined through to headline inflation. In the US, the
with the $900bn Response and Relief Act contribution from the energy component is
passed late last year, means that the likely to add to about 1 percentage point to
amount of fiscal support this year will inflation in the first quarter. Around spring-
amount to about 12% of GDP. time, the contribution from items – such as
Global View | 5
Economic Outlook
airline and hotel room fares – that saw large Large base effects should
price discounts due to tight restrictions this push US inflation to around
time last year will turn positive once again. 3.5% in spring. We wouldn’t
be surprised to see even
Indeed, there is a very good chance that de- larger price increases
mand for services we have not been able to
enjoy over the past year will rebound vigor- Underlying inflation should trend higher
ously as the economy reopens, pushing The real question is whether this episode will
their prices higher. Consumption by high-in- be a one-off price level adjustment or whether
come households in the US remains de- we should expect a more sustained increase
pressed compared to where it was prior to in inflation. Clearly, after a quarter of a century
the pandemic, while the accumulated ex- of subdued inflation, it is tempting to argue
cess savings could reach around $2tn later that there is no need to worry. After all, the true
this year. Similar dynamics can be observed level of unemployment in advanced econo-
in other advanced economies. mies remains extremely large, and for infla-
tion to remain sustainably higher, we need
Base effects to peak in May to see stronger wage dynamics. This is un-
Percentage points likely to happen until strict social distancing
1.0
measures are comprehensively lifted. But
0.5 once they are, we think that US inflation is
0.0 more likely to be above 2% than at any time in
the last 25 years. Inflationary pressures are
-0.5
Forecasts likely to build in other advanced economies
-1.0 too, but probably to a lesser extent.
Jan 20 Jul 20 Jan 21 Jul 21
Items positively affected by Covid There are three reasons supporting our view.
Items negatively affected by Covid
First, as already mentioned above, the amount
Contribution to US CPI inflation
of monetary and fiscal support recently pro-
Source: Macrobond, J. Safra Sarasin, 19.02.2021 vided has been unprecedented. US broad
money supply – which to a large extent re-
Other parts of the basket that have benefited flects households’ and corporates’ cash and
from the pandemic, such as used cars, will savings deposits at banks – picked up by
provide some offset as prices should normal- around $5tn in 2020, a quarter of the existing
ise to the downside, too. All in all, these differ- money stock. In the euro area, it increased by
ent base effects should peak in spring and add €1.5tn. This is very different to what happened
another 1 percentage point to US headline in- after the Global Financial Crisis, when the ex-
flation. We expect core CPI inflation to peak at pansion of the balance sheets of central
about 2.5% in the second quarter, and head- banks boosted banks’ reserves, but only led to
line inflation to top at around 3.5%. Clearly, a modest increase in money supply, as banks
there is scope for inflation to overshoot our were very reluctant to lend to the real econ-
forecasts as big price increases for some omy. Of course, if policy support were swiftly
goods and services might be necessary in or- removed, that would only result in a period of
der to balance demand with available supply, higher inflation that eventually tails off, in line
which the pandemic will likely have dimin- with a drop in the purchasing power of money.
ished. Still, inflation is likely to drop in the sec-
ond half of the year as these effects drop out But, and this brings us to our second point,
of the year on year price comparisons. policy support should be phased out only very
6 | Global View
Economic Outlook
gradually. The Fed will aim to overshoot its tar- interrelated factors – a weakening of trade
get for some time before raising rates. QE ta- unions and the huge increase in global la-
pering will be very gradual and will not happen bour supply following the entry of China into
before ‘substantial’ progress has been made the WTO and Eastern Europe into the EU –
towards achieving its goals. Other central appear to have dampened the relationship
banks are likely to mimic the Fed. On the fiscal between economic slack and inflation in ad-
front, once the American Rescue Plan is vanced economies over the past decades.
signed into law, the US government will focus
on a very large ‘recovery’ bill in order to in- A strong cyclical recovery,
crease public spending on infrastructure. In prolonged policy support and
short, the US output gap should close rapidly, structural changes should
and the economy could already be back at full lead to a more sustained
employment by the end of 2022. Wages are increase in inflation than
likely to rise sooner and faster than many in- economies have experienced
vestors expect. From a monetarist perspec- over the past decades
tive, these policies should push the velocity of
money higher, boosting inflation. European These deflationary forces should slowly abate.
fiscal policy will probably be less expansionary, The pandemic has exacerbated already very
but a return to austerity, as happened after the large income and wealth inequalities, and pol-
financial crisis, is unlikely. icies will increasingly be geared towards clos-
ing that gap. President Biden is pushing for a
Wages could pick up faster than anticipated doubling of the minimum wage (spread over
several years) and aims at boosting wage bar-
gaining power via stronger unions. The ageing
of the population in the developed world and
China implies that a larger number of people
will have to work in the care industry, creating
labour shortages and boosting the bargaining
power of workers in other industries.
To sum up, over the next two years we expect
much stronger real GDP growth as the pan-
Source: Macrobond, J. Safra Sarasin, 19.02.2021 demic fades away and households spend their
vast amount of accumulated savings. This is
Monetary and fiscal authorities should also especially true in the US. Inflation should also
continue to work closely together. The experi- pick up more rapidly than in previous recover-
ence from the crisis has shown that monetary ies, and we expect US core PCE inflation to
and fiscal policy can be very good comple- overshoot 2% by the end of 2022. Euro area
ments and can create policy space for both. inflation is not expected to get to 2% before
This should help restore central banks’ credi- 2023. Strong nominal growth should support
bility in achieving their inflation target, and risk assets, but the ability of the Fed to guide
boost long-term inflation expectations. markets as it gradually removes its monetary
accommodation will be crucial.
Finally, structural changes should become
more inflationary over the longer term. Work Raphael Olszyna-Marzys
by multinational institutions shows that two International Economist
Global View | 7
Sail cruise during midnight sun, Greenland
Forex Strategy
Forex Strategy
More euro gains expected
We expect the US dollar to weaken over the course of the year. The global recovery, high US
budget deficits and rising expectations for US inflation are all likely to help the euro, and com-
modity currencies in particular, to gain ground against the anti-cyclical greenback. The Swiss
franc and the Japanese yen should continue to hold up well. The gold price is poised to consoli-
date further over the coming months, although a slight recovery is expected in the second half of
the year.
Dollar set to remain weak More gains for the euro this year
A dominant feature of currency markets at the We expect the euro to benefit in particular
start of 2021 was the strong US dollar. This from the global economic recovery. Strict lock-
was likely the result of higher nominal US down measures in Europe have led to high
yields and relatively solid corporate profits in savings ratios and pent-up demand for goods
the current reporting season, but also the suc- and services. The release of this demand
cessful rollout of the US vaccination cam- should boost euro area growth in the second
paign. However, efforts in other developed half of 2021, which will likely be reflected in
countries should gather pace as new vaccines more positive economic sentiment indicators.
are becoming available. This should allow for Historically, these show a close correlation
a noticeable easing of the current restrictions with the euro/dollar exchange rate. In addi-
over the course of the second quarter, which tion, low inflation expectations in Europe
should provide fresh impetus to the global should also be supportive for the euro.
economic recovery. Because of its anti-cyclical
behaviour, the US dollar is likely to continue More upside for energy-related currencies
the downward trend initiated last year. A fur- 140
ther rise in US inflation expectations would ac-
120
celerate this trend.
100
The US dollar is an anti-
cyclical currency 80
60
The euro’s behaviour is very pro-cyclical
40
2018 2019 2020 2021
Commodities Ex-Energy Energy/oil
Source: Bloomberg, J. Safra Sarasin, 12.02.2021
Gains in energy-related currencies
The currencies of energy-related countries
are set to benefit from the recovery of the
global economy this year. Even though the
trend to clean and sustainable energy will
weaken demand for oil in the medium to
Source: Macrobond, J. Safra Sarasin, 12.02.2021 longer term, the pending revival of the tourist
Global View | 9Forex Strategy
industry and mobility in general should boost yields, we expect these two currencies to ap-
oil consumption in the short term. Therefore, preciate against the US dollar in particular. In
the currencies of oil-exporting countries, the addition, the economic performance of both
Canadian dollar and the Norwegian kroner, countries so far has been less impacted by the
should outperform the Australian or New Zea- pandemic. They should therefore manage to
land dollar. revert to their pre-crisis GDP levels more
quickly than euro area countries.
Mixed outlook for sterling
The UK’s final exit from the European Union We expect the Japanese yen
leaves the country far less integrated in the EU and the Swiss franc to benefit
single market. We believe this will have a neg- from their safe haven status
ative impact on sterling. On a more positive
note, the UK has made rapid progress in the Gold will likely consolidate further
vaccination campaign, which should allow the The nascent global recovery will tend to have a
UK to open its economy sooner than other mixed effect on the gold price. Whereas we ex-
countries. The rapid immunisation of the pop- pect a moderate increase in real yields to pro-
ulation could therefore compensate at least in vide some headwind for the price of gold, we
part for some of Brexit’s negative effects on still anticipate demand for physical gold, which
growth in the short term. Overall, we expect collapsed last year, to recover again, helping
sterling to weaken against the euro, partly due to support the gold price. In the years ahead,
to lower real yields, but to appreciate against however, we think the yellow metal still has
the US dollar. further upside potential in view of the expected
rise in inflation rates.
A more stable EUR/CHF rate
1.02 15 Physical demand should support the gold
price
1.04 10
1.06 5
1.08 0
1.10 -5
Jan-20 Apr-20 Jul-20 Oct-20 Jan-21
EUR-CHF, lhs
SNB sight deposits, weekly change in CHF bn, rhs
Source: Macrobond, J. Safra Sarasin, 12.02.2021
Swiss franc and Japanese yen should still hold
up well Source: Macrobond, J. Safra Sarasin, 12.02.2021
The Swiss franc and the Japanese yen, which
both enjoy safe haven status, should hold up Dr Claudio Wewel
well. Because of the attractive level of real Currency strategist
10 | Global ViewFixed Income Strategy
Fixed Income Strategy
Higher volatility ahead
The expected improvement in global growth will intensify the debate about the timeline for the
removal of monetary accommodation in the Developed Markets’ (DM) rate space. While inflation
expectations should continue to increase, there will also be some upward pressure on real yields
as markets start to price higher policy rates. Volatility in the DM fixed income space will therefore
rise. We continue to forecast higher bond yields and steeper yield curves for all markets.
Market-based inflation expectations are likely This is reflected in market-based inflation ex-
to stay elevated pectations, which have already recovered
With headwinds from the COVID-pandemic strongly from the lows. We believe they will
likely to ease over the next few months, we rise further.
expect the global economy to improve mark-
edly from the second quarter 2021 on- Expect some upward pressure on real yields
wards. Financial conditions in the devel- Real yields are highly correlated with implied
oped markets’ space are very loose and cen- policy rates in forward markets. Higher policy
tral banks have pledged not to remove mon- rates imply stronger growth ahead, which is
etary accommodation prematurely. Strong usually associated with a required rise in real
fiscal support complements monetary policy yields. Similarly, expectations for an eventual
in a concerted effort to run the economies ‘tapering’ of central banks’ asset purchases
hot. We forecast US core CPI to increase to (which have lowered real yields) should lead to
around 3% over the next years. Conse- upward pressure on real rates.
quently, we believe that market-based infla-
tion expectations will remain elevated as There is a close relationship between real
markets adapt to a higher inflation level. yields and implied policy rates
This is most pertinent in Dollar-based econ- 2.0 4.0
omies (US, Australia, New Zealand, Can-
3.0
ada), but we would also expect inflation ex- 1.0
pectations to increase in the euro area, 2.0
0.0
Switzerland and the UK as the global econ-
1.0
omy gains traction.
-1.0
0.0
Inflation expectations to remain elevated
-2.0 -1.0
2010 2013 2017 2021
3.0
~ 2.5% Developed markets 10y real yield (TIPS)
Developed markets implied policy rate in 3y, rhs
2.0
Source: Bloomberg, J. Safra Sarasin, 19.02.2021
1.0 We are convinced that the debate about a re-
moval of monetary accommodation is set to
0.0 intensify in 2021, in particular in the Dollar
2001 2009 2017 2025
US Core CPI YoY markets. Therefore, we expect upward pres-
JSS Forecast US Core CPI (trend) sure on real yields, but not a ‘taper tantrum’,
US 10y breakeven rate
as in 2013, when the flawed communication
Source: Macrobond, J. Safra Sarasin, 19.02.2021 with respect to a planned reduction of asset
Global View | 11Fixed Income Strategy
purchases led to a spike in real yields in the The US yield curve is already steepening
US. Unlike 2013, central banks will be more 80 150
proactive in preparing the markets long be-
forehand. Moreover, they will be slow to 60
100
acknowledge progress on the inflation front
40
and continue to lean against unwanted rate
hike expectations. Also, given the strongly ris- 50
20
ing deficits due to fiscal support measures,
central banks will find it hard to taper their pur- 0 0
chases fast and substantially without risking Jan-20 Apr-20 Aug-20 Dec-20
an unwelcome rise in (real) long-term yields. US 2y/10y steepness (bp)
Nevertheless, there is a risk that a stronger US 5y/30y steepness (bp, r.h.s)
economic rebound and a higher inflation tra- Source: Macrobond, J. Safra Sarasin, 19.02.2021
jectory will force the central banks’ hand ear-
lier than expected. Therefore, we expect vola- However, a meaningful premature rise in real
tility in the global fixed income markets to in- yields would lead to a tightening of financial
crease markedly in 2021. We expect higher conditions and would be unwelcome at the
bond yields and steeper curves, in particular in current stage. The Fed will likely continue to
the Dollar markets. use forward guidance to dampen rate hike
expectations and could even shift asset pur-
US – strong rebound in Q2 2021 chases to longer maturities with a particular
After a relatively soft Q1 2021, due to COVID- focus on purchasing TIPS if needed.
related restrictions, we expect the US econ-
omy to accelerate as the services sector Rate expectations have started to rise in the
comes progressively back online. The more Dollar markets
widespread availability of vaccines will bring 2.5
substantial relief to the US economy as we
2.0
move into the second half of 2021. With the
introduction of Average Inflation Targeting 1.5 Implied policy
rates in 3y
(AIT), the Fed has explicitly stated that it will
not preemptively lift interest rates. The year- 1.0
over-year comparison in the CPI will exhibit
0.5
jumps due to base effects, with a peak likely in
Q2 2021, before drifting back again. We doubt 0.0
that these fluctuations will convince the Fed to Jan-19 Jul-19 Jan-20 Jul-20 Jan-21
CAD AUD USD
change course. It will likely take a longer
stretch of above-target inflation prints to con- Source: Bloomberg, J. Safra Sarasin, 19.02.2021
vince the Fed that it has achieved its target.
Consequently, we expect the Fed to be slow to Euro area – policy to remain loose
recognize progress on the inflation front. Nev- The European Central Bank (ECB) has not
ertheless, we expect US yields to rise further managed to attain its inflation target despite
and the curve to extend its steepening trend. delivering substantial amounts of monetary
As mentioned in the introductory paragraph, accommodation for the past 10 years. There-
we expect some upward pressure on real fore, low inflation expectations in the euro
yields during the course of 2021 as the market area (EA) continue to be firmly entrenched.
will start to price in higher Fed Funds rates. In Nevertheless, market-based inflation expecta-
fact, implied policy rates have already started tions have recovered since the lows registered
to increase from the lows reached last year. in April 2020, and while they are still signifi-
12 | Global ViewFixed Income Strategy
cantly below target, we would expect some up- UK – optimism by successful vaccine roll-out
side if the euro area economy accelerates as The fast and successful roll-out of the COVID
forecast in the second half of 2021. vaccine in the UK has led to expectations of
an earlier lifting of lockdown measures and
The message from the last ECB press confer- hence a swifter rebound in economic growth.
ence reflected cautious optimism with re- While the Bank of England is still considering
spect to both growth and inflation in the euro negative policy rates, they have become less
area. In its quest to maintain favourable fi- likely now. Consequently, Gilt yields have
nancing conditions, the ECB had prevented started to rise and the yield curve has steep-
any steepening of the yield curves in the euro ened substantially. However, the headwinds
area by effectively removing net supply from from Brexit have not gone away and will con-
markets through substantial asset pur- tinue to haunt the UK economy in the me-
chases. The reference to the fact that “asset dium to longer term. Still, we expect Gilt
purchase envelopes might not have to be yields to rise in 2021 along with the acceler-
used in full”, is an indication that the ECB ation in global economic growth.
could accept some moderate steepening of
the yield curves if the euro area economy UK yield curve steepening has accelerated
gains traction in the second half of 2021. 60 120
However, this will not imply changes to for-
50 100
ward guidance or a more timely reduction in
asset purchases any time soon. The fiscal 40 80
stimulus measures in the euro area have led 30 60
to a large increase in public debt for member
20 40
states and hence large euro area government
10 20
bond (EGB) issuance, which will require sub-
stantial asset purchases, in particular with 0 0
Jan-20 May-20 Sep-20 Feb-21
regard to the euro area peripheral markets.
Still, the slight change in tone will likely be UK 2y/10y steepness (bp)
UK 5y/30y steepness (bp, rhs)
enough to lift long-term bond yields moder-
ately through steeper yield curves Source: Macrobond, J. Safra Sarasin, 19.02.2021
EA yield curves have started to steepen Japan – no policy change expected
50 100 We expect no significant change in policy
from the Bank of Japan (BoJ) in 2021. The
40 80
BoJ will maintain its yield curve control with a
30 60 tight target corridor around the zero level for
the 10-year sector, and some wanted curve
20 40
steepness in ultra-long maturities will remain
10 20 in place. We continue to expect current yield
levels to persist for an extended period of
0 0
time.
Jan-20 May-20 Sep-20 Feb-21
GE 2y/10y steepness (bp)
GE 5y/30y steepness (bp, rhs) Alex Rohner
Source: Macrobond, J. Safra Sarasin, 19.02.2021 Fixed Income Strategist
Global View | 13Windsurfer in Maui, Hawaii
Equity Strategy
Equity Strategy
A rising, yet bumpy path ahead
Equity markets have been in a goldilocks environment over recent months. The combination of
rising inflation expectations and falling real yields has supported earnings expectations on the
one hand and valuations on the other. While we think that inflation will continue to move higher
and remain upbeat on the earnings outlook for the months ahead, real rates are set to turn from
tailwind to headwind. As long as real rates rise only gradually – as is our base case – the upside
for equities will prevail. At the sector-level, however, this may come with a change in leadership
and a road ahead, which may not be as smooth as it has been over past months.
A lot has gone right for equities A goldilocks environment for equities
%
A lot has gone right for equities over the past
few months. The release of various vaccines 2.5
since the beginning of November, a US elec-
tion outcome which allows for substantial fis- 1.5
cal support and a positive Q4 earnings season
have reinforced the perception that the equity 0.5
market recovery is more than just hot air.
-0.5
A lot has gone right for
-1.5
equities in 2020 2009 2011 2013 2015 2017 2019 2021
US inflation expectations US 10Y TIPS yield
US earnings for Q4 2020 eked out a small Source: Refinitiv, J. Safra Sarasin, 19.02.2021
rise over Q4 2019 results - which is remarka-
ble considering that 2019 was completely The current situation defies the typical sea-
unaffected by COVID - while European earn- sonal pattern. Usually, earnings expectations
ings also delivered strong beats over expec- enter the year at elevated levels only to see re-
tations. ality seep in and downgrades take hold. Down-
grades usually trough at the end of Q1, before
More fundamentally, the market’s key driv- they stabilise towards the end of the year.
ers remained firmly in place, keeping the
goldilocks environment for equities alive. Strong earnings momentum going into 2021
Consensus revisions to global equity earnings
Central banks left no doubt that they would 8
throughout the year, 6-month revisions, %
continue to provide monetary accommoda- 6
tion until inflation has firmly accelerated to 4 2021 consensus
2% or higher, putting speculation about a revisions
2
premature tightening to rest. As a result,
0
real rates declined, while inflation expecta-
tions continued to rise. -2
-4
Equities were the key beneficiaries as lofty val- -6
uations were sustained by lower discount Jan Mar May Jul Sep Nov
rates, while consensus earnings expectations Average revisions past 10 years 2021
saw further upgrades. Source: Refinitiv, J. Safra Sarasin, 19.02.2021
Global View | 15Equity Strategy
The reasons for the relative strength of earn- likely derail the equity recovery by compress-
ings going into 2021 have been threefold: (a) ing valuations. In a more benign scenario,
as mentioned above, Q4 reported earnings which is our base case, real yields grind
have been well above expectations, providing higher as expectations for monetary tighten-
a stronger base for future earnings, (b) earn- ing slowly build up in light of improving eco-
ings from energy- and materials-related com- nomic data.
panies have followed the move higher in com-
modity prices and (c) expectations for an ac- Equity valuations benefit from low real yields
celeration of economic momentum have lifted -1.4
the general economic outlook. As a result, up- 20 MSCI AC World, 12m fwd PE
-0.9
grades have been broad based, with commod- US TIPS yield, %, inv. (rhs)
ity-sensitive sectors benefiting the most, fol- 18 -0.4
lowed by tech and financials.
0.1
16
Commodity-driven earnings show strength
0.6
Materials 14
Energy 1.1
IT
12
Financials 2015 2016 2017 2018 2019 2020 2021
C. Discretionary Source: Refinitiv, J. Safra Sarasin, 19.02.2021
AC World
Comm. Services
Market upside should prevail in such a sce-
Health Care
Industrials nario as headwinds for valuations remain
Utilities 3-month revisions to 12-month moderate. In both scenarios, we believe the
forward earnings by sector (%)
C. Staples most promising strategy to be a sector alloca-
0 4 8 12 16 tion that benefits from higher inflation expec-
Source: Refinitiv, J. Safra Sarasin, 19.02.2021 tations and is immune to a rise in real yields.
We think the market is right to believe that eco- Real yields partly reflect Fed expectations
% %
nomic activity will bounce back once re- 6.5
strictions are lifted. A massive accumulation of 3.0
5.5
household savings in the US and in Europe, 2.4
4.5
combined with unprecedented fiscal and mon- 1.8
3.5
etary support, should help growth to accelerate. 1.2
Based on our GDP growth forecast of 6.9% for 0.6
2.5
the US in 2021, earnings expectations are set 0.0 1.5
to gain 10%-15% until the end of the year. -0.6 0.5
-1.2 -0.5
Fed tightening expectations are a risk 2006 2009 2012 2015 2018 2021
Absent any unknown risk events, the biggest US TIPS 10Y US 3Y Fed Funds future (rhs)
challenge to further market upside, in our Source: Refinitiv, J. Safra Sarasin, 19.02.2021
view, is a US economy that is running too hot
with a concomitant rise in expectations for Position for a reflationary environment
policy rates. Given that much of the equity re- Consequently, we prefer banks and other fi-
covery in 2020 has been a function of falling nancials as they tend to benefit from rising
real yields, which typically move in lockstep yields, no matter if the increase is driven by in-
with implied Fed Funds rates, an abrupt flation expectations or real yields. Among all
change in the Fed’s dovish messaging would sectors, they are the main beneficiaries of
16 | Global ViewEquity Strategy
rising rates as their earnings are closely re- more cyclical sectors, should be less affected.
lated to the level and the steepness of the yield The long-term outlook for tech, however, is
curve. positive. The sector’s ability to generate and
sustain superior earnings growth will support
Banks benefit from a steeper yield curve its structural attractiveness.
9.5 250
8.5 Tech has become increasingly defensive
200
7.5 30 -1.3
6.5 150 28
-0.8
26
5.5 100
24 -0.3
4.5
50 22
3.5 0.2
20
2.5 0
18 0.7
2009 2012 2015 2018 2021
European banks EPS, 12-month lag 16
1.2
EMU yield curve, 10Y-2Y, bps (rhs)
14
Source: Refinitiv, J. Safra Sarasin, 19.02.2021 2018 2019 2020 2021
US tech, PE US TIPS yield (%), inv. (rhs)
On the other hand, we are cautious on defen- Source: Refinitiv, J. Safra Sarasin, 19.02.2021
sive long-duration sectors, given the vulnera-
bility of valuations if real rates move higher. For the equity market in general, short-term
Typically, this includes consumer staples, util- setbacks are likely over coming months as the
ities or health care providers. Although they repositioning at the sector level will be accom-
may have sound business models and stable panied by volatility, but the projected strong
long-term earnings prospects, they tend to un- recovery in macro data still implies upside un-
derperform when discount rates rise. til the end of the year.
In our view, a growing part of the tech universe We forecast the S&P 500 to
should also be considered defensive. While reach a level of 4100 by the
tech earnings continue to grow at an impres- end of 2021
sive pace, 2020 has also shown that the sec-
tor is incredibly resilient to economic set- We project the S&P 500 to reach a level of
backs. As a result, valuations have surged on 4100 by the end of 2021, supported by a
the premise that earnings are more stable strong recovery in earnings expectations,
than previously assumed. This comes with a which should more than offset the expected
drawback though. The sector appears more de-rating of price-to-earnings multiples.
sensitive to adverse rate moves than in the
past. At the current juncture, this may result in Wolf von Rotberg
increased headwinds for tech, while other, Equity Strategist
Global View | 17Sailing ships in the Aegean Sea
Sustainability Focus
Sustainability Focus
The World’s Carbon Budget and what
it means for investors
The cyclical upswing we are currently in is creating additional demand for commodities and is
also pushing up oil prices and oil stocks. But the securities of companies with exposure to fossil
fuels carry long-term risks. These arise not so much from a possible scarcity of fossil resources,
but rather from a shortage of the earth's atmosphere's capacity to absorb carbon dioxide emis-
sions. As the world's governments set out to create policies to combat global warming and reduce
CO2 emissions, there are important implications for investors.
We are unlikely to run out of fossil fuels very This is the sober, albeit abridged, conclusion
soon… of the scientific studies of the World Climate
In the 1970s, the “Club of Rome” - a group of Council, the Intergovernmental Panel on Cli-
natural scientists - predicted the imminent mate Change (IPCC). We know that there is a
limits to growth. Its argumentation: fossil fuels direct link between the greenhouse gases
are finite and so is the growth of an economy (GHG) emitted by humans and the rise in the
based on these energies. Once burnt up, global temperature compared to the pre-in-
growth ends because these fuels are non-re- dustrial era. If emissions rise, temperatures
newable. rise as well. So for each amount of green-
house gases emitted, the IPCC calculates a
« If we continue like this, we temperature with a certain probability. We
only have seven years left are now already facing one degree of global
until global warming warming. In order to limit the expected tem-
reaches 1.5°C » perature increase to 1.5°C, the IPCC esti-
mates that we will only be able to emit a total
Since this warning, however, the exploration of of 300 gigatons (Gt) of CO2e. This is the so-
new oil and gas deposits has pushed the sce- called carbon budget we have left. At current
nario of a possible shortage of resources rates, it will last for only seven more years.
about 400 years further into the future. With The less we emit today, the longer the budget
the structural shift towards the service econ- will last.
omy, the CO2 intensity of economic growth has
decreased considerably, so that fossil re- CO2 emissions and the way to net-zero
serves could last even longer. Does this mean
that it was all just scaremongering? The an-
swer is no, because the limiting element for
fossil energies is not their finiteness, but the
absorption capacity of the earth's atmos-
phere.
…but the budget of the still burnable carbon
reserves will be depleted
“If we continue like this, we only have seven
years left until global warming reaches 1.5°C.” Source: Cicero.no, Glen Peters, 01.2020
Global View | 19Sustainability Focus
Share of thermal coal in total energy produc- Share of renewable energies in total energy
tion in % production in %
Source: Refinitiv, J. Safra Sarasin, 15.02.2021 Source: Refinitiv, J. Safra Sarasin, 15.02.2021
What are the implications of the carbon What does the carbon budget imply for inves-
budget? tors?
The budget implies that CO2 emissions must These announcements will be followed up with
be radically reduced. There are many possi- increased regulations, taxes, penalties and in-
ble pathways. But it is generally accepted centives. This is bad news for fossil fuel com-
that by 2050, humanity should aim panies. All known existing fossil gas,
for net-zero carbon emis- oil and coal reserves far ex-
sions. This means that by ceed the carbon budget. If
then, the same we also add to this the
amount of carbon presumed but as yet
that is emitted,
«The CO 2 untapped reserves,
should be ab-
sorbed - a very am-
bubble could we arrive at an
amount of almost
bitious plan! The amount to a 3000 Gt of CO2e of
good news is that potential emis-
more and more capitalization sions. But if only
countries are com- around 300 Gt can
mitting themselves of $ 26 tn» be emitted in line
to the Paris Accord with the climate tar-
with concrete targets. A gets, the rest of the fossil
large number of countries has reserves will become worth-
announced over the last year that less in the very near future. They will
they would reduce greenhouse gas emis- become stranded! And along with them, the
sions to net-zero by 2050, including Japan, power stations, ships, planes and trucks that
the UK and also Switzerland. Even China - burn them as well as the companies that man-
one of the largest GHG emitters - is aiming to ufacture them.
reach net-zero by 2060. The incoming US ad-
ministration has announced to step up their What is at risk for investors?
efforts for a green new deal. The European The risk of “stranded assets” is a problem not
Union is increasing its already ambitious tar- only for companies but also for investors. Over
get from a 40% reduction to 55% by 2030. the next few years, the securities of fossil-fuel-
20 | Global ViewSustainability Focus
exposed companies could be drastically deval- 2050. Entire new industries of carbon-posi-
ued. CarbonTracker estimates that a total of tive activities such as carbon capturing and
USD 26 trillion in market capitalization could storage, forestry and soil-preservation will
be at risk. They have long argued that the have emerged in order to compensate the
stranded assets are a carbon bubble waiting remaining carbon emissions. Other indus-
to burst. Worried by this prospect, the Global tries will employ technologies to substitute
Financial Stability Board under Mark Carney, or store carbohydrates. For example, more
the former governor of the Bank of England, and more buildings will be built with wood to
has done everything to increase the level of store CO2. Companies will have diversified
available information on climate-related expo- their businesses to become carbon-neutral
sures by encouraging companies to report or positive themselves. Investors can bene-
them. Looking at the performance of energy fit by picking these champions of tomorrow.
stocks in the last ten years, it seems that the At the same time, they should avoid
bubble has already deflated slowly but surely. stranded assets while reducing the carbon
The mostly fossil-dependent energy sector has footprint in order to protect their portfolios
underperformed the MSCI World Index by against the unavoidable climate transition.
around 75% percent over the last ten years.
And more underperformance is yet to come. Dr. Jan Amrit Poser
Chief Strategist & Head Sustainability
The energy sector has underperformed the
broad market over the last 10 years Equity market capitalization of fossil fuel re-
lated groups ($tn)
Source: CarbonTracker.org, 01.2021
Corporate bonds of the fossil fuel related
Source: Refinitiv, J. Safra Sarasin, 15.02.2021 groups outstanding ($tn)
How should investors position themselves?
While the carbon bubble is deflating and fos-
sil-fuel-assets are stranding, there will also
be huge opportunities for investors. The in-
troduction of carbon taxes and cap-and-
trade-systems will spur a structural shift to a
net-zero carbon emitting world economy by Source: CarbonTracker.org, 01.2021
Global View | 21Asset Allocation
Asset Allocation
Sustainable recovery
Jan Bopp has been a Senior Investment Strategist with Bank J. Safra Sarasin since 2016. He is a
member of the CIO Office and responsible for providing input to the Investment Committee and
implementing tactical allocation for the mandate profiles. On top of that, he is author of the
monthly publication “Market Review & Outlook” and writes a regular column for the Swiss busi-
ness newspaper “Finanz und Wirtschaft”. Before joining J. Safra Sarasin in Zurich, he worked as
a sell-side analyst und currency overlay manager in Frankfurt. Jan Bopp studied business admin-
istration at the Warwick Business School in the UK and the University of Mannheim. We spoke
with him about the most important topics of the day in the field of asset allocation.
Global View: Mr Bopp, in ernments have accumulated deficits that no-
the first few weeks of the body would have thought politically viable be-
new year we have already fore the pandemic. This has been the only
experienced some dra- downturn in recent history where disposable in-
matic events. What’s your comes have actually risen during a deep reces-
view of things? sion. A large part of this income has been saved
Dramatic is definitely the and is likely to generate considerable pent-up
right word. The storming of the US Capitol build- demand and high growth rates in the second
ing on 6 January clearly demonstrated that po- half of the year.
litical risks exist even in established democra-
cies. And the story widely reported in the media GV: Is it possible that the fiscal stimuli could
of small investors who got together over social lead to the US economy overheating, thus driv-
media to take on the big hedge funds also ing inflation rates higher?
stoked uncertainty and triggered some volatility That is certainly a danger and something we
in financial markets, even though it was very have discussed at length in our Investment
short-lived. Ultimately, market participants Committee. On the one hand, we expect a dis-
quickly switch their focus back to the issues tinct but limited rise in inflation in the current
that are most important for the future perfor- year, mainly due to base effects caused by the
mance of the economy: fiscal and monetary COVID pandemic. In 2022, we expect inflation
policy measures, and the containment of the rates to rise gradually as well. But the picture
coronavirus. might perhaps look different in three to five
years’ time. It is quite possible to imagine a
GV: Although the number of new cases has world where strong fiscal dominance produces
fallen recently, lockdowns persist in many re- high inflation. That’s why it is important to
gions of the world. Are investors perhaps being hedge portfolios accordingly. Nevertheless, we
too optimistic about the strength of the eco- expect inflation generally to remain under con-
nomic recovery? trol. There is little to suggest otherwise at the
I don’t think so. I would even say there are good current moment.
reasons to be positive about the future. The
concerted effort by countries and institutions to GV: Which asset classes offer effective protec-
implement sweeping fiscal and monetary policy tion against inflation?
measures should not be underestimated. Gov- Apart from inflation-linked bonds, whose cou-
22 | Global ViewAsset Allocation
pon is directly tied to the rate of inflation, com- on cyclical regions, such as Europe and
modities also exhibit strong correlation with un- emerging markets. Europe has recently lost
derlying inflation. However, this works in both some of its positive momentum, but the cycli-
directions. The timing has to be spot on: just cal nature of the economy is an advantage for
as the return on commodity investments is this region. A little more patience than we orig-
very positive when inflation is rising, it is inally thought is required. As far as the pro-
clearly negative when inflation starts to fall gress of the vaccination programme is con-
again. Equities on the other hand provide cerned, Europe is three to six months behind
higher long-term real returns during inflation- the US, and it therefore lags the US economic
ary periods, in particular specific sectors such cycle as well. But the trend is positive and gov-
as financials or automotive companies, as well ernments are determined to boost growth.
as SMEs. Emerging markets equities and This should lead to an outperformance of cy-
bonds also tend to do particularly well when in- clical regions.
flation starts to climb. The cyclical nature of
the emerging markets space ensures a stable GV: There have been substantial inflows into
foundation. sustainable investments in recent months.
Why is that?
GV: What about the US Fed? Could high infla- Sustainability has been a central theme for as-
tion rates force it to start raising interest rates set managers for some years – and even dec-
sooner than the market currently expects? ades for J. Safra Sarasin. The reason for the re-
No, I think that is not very likely. The Fed has cent spike in interest is quite simple: if govern-
made it clear on several occasions that it is still ments take decisive action and create a con-
a long way from even thinking about raising sensus, the results can be incredibly effective.
rates. It is currently focusing its attention mainly Examples include the implementation of a se-
on the labour market. ries of European standards regulating the pro-
motion of sustainability, China’s commitment
GV: Will that have a negative impact on the US to decarbonise, and the US administration’s
dollar? plan to approve investments in a sustainable
Yes, that is what we expect, and not just be- infrastructure based on clean energy sources.
cause of monetary policy. Several factors argue But sustainability claims of all types need to be
for a weaker dollar. On the one hand, the verified. We have therefore integrated in-depth
world’s reserve currency is still overvalued com- sustainability screening into every stage of our
pared to other currencies according to various investment process.
valuation metrics. On the other hand, the high
current account and budget deficits are weigh- So do you predict a positive year for financial
ing on the greenback. Lastly, stronger growth markets?
momentum outside the US – especially in Eu- Essentially yes, especially for sustainable in-
rope and emerging-market regions – should be vestments. Everything is in place, but the path
a net negative for the US dollar in 2021. will be rocky. There will be setbacks, and also
uncertainties about the growth path, fiscal pol-
GV: What consequences does this have for the icy measures and interest rates. The most im-
asset allocation of your multi-asset portfolios? portant message, however, is that we are about
We still have a positive stance on equities. to enter a new economic cycle and are no longer
Within this asset class we are focusing mainly stuck in the old one.
Global View | 23Market & Forecast Overview
Market & Forecast Overview
Market & Forecast Overview
Macroeconomic Forecasts
In % 2020 2021 2022
USA Economic growth ch an. -3.5 6.9 3.7
Inflation ch av. 1.3 2.6 2.2
Euroland Economic growth ch an. -6.7 4.1 3.8
Inflation ch av. 0.3 1.5 1.2
Switzerland Economic growth ch an. -2.8 3.0 2.9
Inflation ch av. -0.7 0.0 0.7
UK Economic growth ch an. -9.9 4.8 6.1
Inflation ch av. 0.9 1.7 1.8
Japan Economic growth ch an. -4.9 3.8 1.4
Inflation ch av. 0.0 0.2 0.8
China Economic growth ch an. 2.3 8.2 5.4
Inflation ch av. 2.5 2.1 2.5
Source: Macrobond, J. Safra Sarasin, 03.03.2021
Policy rate forecasts in %
02.03. 2Q21 3Q21 4Q21
US Fed Funds 0.25 0.25 0.25 0.25
EUR depo rate -0.50 -0.50 -0.50 -0.50
CHF SARON -0.75 -0.75 -0.75 -0.75
BoE base rate 0.10 0.10 0.10 0.10
JP O/N call rate -0.05 -0.10 -0.10 -0.10
Source: Macrobond, J. Safra Sarasin, 03.03.2021
10 year bond yield in %
02.03. 2Q21 3Q21 4Q21
USA 1.42 1.60 1.60 1.70
Germany -0.35 -0.30 -0.25 -0.20
Switzerland -0.32 -0.30 -0.25 -0.20
UK 0.65 0.75 0.80 0.85
Japan 0.10 0.10 0.10 0.15
Source: Datastream, J. Safra Sarasin, 03.03.2021
FX-Forecasts
02.03. 2Q21 3Q21 4Q21
EUR-CHF 1.10 1.08 1.08 1.08
EUR-USD 1.21 1.25 1.28 1.30
EUR-GBP 0.86 0.88 0.89 0.90
USD-JPY 107.0 104.0 102.0 100.0
USD-CHF 0.91 0.86 0.84 0.83
USD-CNY 6.47 6.44 6.42 6.40
Source: Macrobond, J. Safra Sarasin, 03.03.2021
24 | Global ViewMarket & Forecast Overview
Stock index price forecasts
02.03. P/E ratio Dec-21 Dec-22
USA
S&P 500 3’870 23.5 4’100 4‘500
Nasdaq 100 13’060 29.7 13‘900 15‘500
Europe
FTSE 100 6’614 15.0 7‘100 7‘650
DJ Euro Stoxx 50 3‘708 18.5 3‘950 4‘250
DAX 14‘040 15.9 14‘900 16‘000
SMI 10‘817 18.0 11‘400 12‘300
SPI 13‘481 19.3 14‘200 15‘300
SMIM (Swiss Mid-Caps) 2‘962 17.4 3‘150 3‘400
Japan
MSCI Japan 1‘162 18.0 1’220 1’300
Emerging Markets
MSCI EM 1’360 13.5 1’450 1’650
MSCI China 116 15.9 125 140
Source: Datastream, J. Safra Sarasin, 03.03.2021
Equity Strategy Asset Allocation
Regions Sectors Asset Classes Position
Bonds –
Euroland Overweight Banks
UK Insurance Government Bonds – –
Industrials IG Corporate Bonds –
Energy High Yield Bonds +
Consumer Discretionary
EM Bonds +
Equities +
China Neutral Health Care
Developed Markets =
Japan Materials
EM Information Technology Emerging Markets +
Switzerland Communication Services
Liquidity =
Alternatives +
USA Underweight Consumer Staples Convertible Bonds =
Real Estate
Other Alternatives +
Utilities
Source: J. Safra Sarasin, 03.03.2021 Source: J. Safra Sarasin, 03.03.2021
Global View | 25Contacts
Contacts
Dr. Jan Amrit Poser
Chief Strategist & Head Sustainability
+41 (0)58 317 4477
jan.poser@jsafrasarasin.com
Dr. Karsten Junius, CFA Raphael Olszyna-Marzys
Chief Economist International Economist
+41 (0)58 317 3279 +41 (0)58 317 3269
karsten.junius@jsafrasarasin.com raphael.olszyna-marzys@jsafrasarasin.com
Wolf von Rotberg Alex Rohner
Equity Market Strategist Fixed Income Strategist
+41 (0)58 317 3020 +41 (0)58 317 3224
wolf.vonrotberg@jsafrasarasin.com alex.rohner@jsafrasarasin.com
Dr. Claudio Wewel Frank Härtel
FX Strategist Head Asset Allocation
+41 (0)58 317 3226 +41 (0)58 317 3359
claudio.wewel@jsafrasarasin.com frank.haertel@jsafrasarasin.com
Jan Bopp Thomas Bollinger
Asset Allocation Strategist Asset Allocation Strategist
+41 (0)58 317 3079 +41 (0)58 317 6221
jan.bopp@jsafrasarasin.com thomas.bollinger@jsafrasarasin.com
Global View | 27Disclaimer/Important Information This document has been prepared by Bank J. Safra Sarasin Ltd (“Bank”) for information purposes only. It is not the result of financial research conducted. Therefore, the “Directives on the Independence of Financial Research” of the Swiss Bankers Association do not apply to this document. This document is based on publicly available information and data (“the Information”) believed to be correct, accurate and complete. The Bank has not verified and is unable to guarantee the accuracy and completeness of the Information contained herein. Possible errors or incompleteness of the Information do not constitute legal grounds (contractual or tacit) for liability, either with regard to direct, indirect or consequential damages. In particular, neither the Bank nor its shareholders and employees shall be liable for the views contained in this document. 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FTSE Russell is a trading name of certain of the LSE Group companies. “FTSE Russell®”, is a trade mark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communi- cation.” FTSE Russell: FTSE UK/FTSE Italia Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2020. 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