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Global View Outlook 2021
Cover: Viaduct in the Carpathian Mountains, Ukraine
Contents
Foreword
Transforming climate policy 3
Economic Outlook
Between now and then 5
Forex Strategy
Covid vaccine to lift euro 9
Fixed Income Strategy
Inflation expectations to rise in 2021 11
Equity Strategy
The big (earnings) comeback 15
Sustainability Focus
A “Decade of Action” to deliver the UN’s Sustainable Development Goals 19
Asset Allocation
The return of predictability 22
Market & Forecast Overview 24
Contacts 27
Foreword
Foreword
Transforming climate policy
Dear Reader Radical measures are needed to reshape the
economy in a sustainable way. We expect the
Even though the shock of the pandemic and social costs of greenhouse gas emissions to
the subsequent recession will see 2020 go be offset by a nationwide system of CO2 pric-
down in history as a lost year, 2021 promises ing. This will increase the price of climate-
to deliver more positive trends on all fronts. damaging fossil-based electricity, promote re-
Successes in developing an effective vaccine newable energies and encourage carbon cap-
will hopefully help to contain the latest spike in ture and storage. We also expect stricter envi-
infection rates. Further fiscal stimulus ronmental regulations for the electricity and
measures to support broad sections of society energy sector. To establish market transpar-
should cushion the devastating economic im- ency, companies will probably have to report
pact. In the US, the split majority situation in their climate risks in the future. To raise the
Congress is forcing the two main parties to necessary capital, the US could copy the EU by
reach a consensus. Central banks are on hand introducing an action plan for sustainable fi-
to support fiscal policy with monetary nancing in a move to encourage sustainable
measures. investments.
Importantly, the environment for investment The adoption of an inclusive and sustainable
is improving. The president-elect, Joe Biden, climate policy that creates jobs and also re-in-
has pledged to re-join the Paris climate tegrates the losers of globalisation into the la-
agreement on the first day he takes up office. bour market is key to overcoming the increas-
Although this may be a token gesture, it has ing divisions in US society following the global
huge symbolic significance for the global financial crisis of 2008 and blocking the re-
economy. After the European Union an- emergence of divisive forces. This will be the
nounced plans to become carbon neutral by main yard stick against which the new US
2050, and China said it will follow suit by president will be measured.
2060, they will now be joined by the US, the
world’s third major economic block, along
with 195 other countries in transforming cli-
mate policy.
Joe Biden has announced a 10-year plan to
invest two trillion US dollars in future-ori-
ented sectors rather than continuing to sub-
sidise struggling outdated industries with
high greenhouse gas emissions. His agenda
for climate change and jobs is also being
called the “Green New Deal” in reference to Best wishes,
Franklin D. Roosevelt’s “New Deal” of eco-
nomic and social reforms during the period
1933-38, which helped to overcome the Dr Jan Amrit Poser
global economic crisis. Chief Strategist & Head Sustainability
Global View | 3
Snow Flake
Economic Outlook
Economic Outlook
Between now and then
Rolling waves of Covid-19 infections, and the resulting restrictions on economic life, will weigh
on the global economy over the winter months. Yet the breakthrough to an effective vaccine
against the pandemic sets the stage for a broader economic recovery in 2021 that, in the near
term, will be supported by very generous fiscal transfers and monetary accommodation. A more
predictable US administration and reduced policy uncertainty should help boost global trade too.
Inflation could surprise positively in the second half of 2021, leading to steeper yield curves.
The pandemic, the health response and un- cautious approach to relaxing restrictions
precedented fiscal and monetary support given high hospitalisation rates. In the US, in-
have shaped the global economy in 2020. fections will probably continue to accelerate
These forces will continue to drive the econ- into 2021. But there too, the strains on the
omy next year. In particular, three recent de- health system will push authorities to intro-
velopments will matter most for the outlook: duce new curbs on activity. The economic ef-
the different waves of Covid-19 infections over fect of the latest lockdowns will not be as pain-
the winter; the new balance of power in the US; ful as in the first round in spring, but it will still
and the breakthrough to a vaccine. be severe. The impacted sectors represent
around 5-10% of GDP and up to 20% of em-
In the near term, the global economic recovery ployment in developed economies. A supply-
is likely to stall or even reverse. Policy uncer- side approach suggests that a full one-month
tainty – and therefore market volatility – shutdown of these sectors, followed by a full
should also remain high. Yet the ‘vaccine light’ and immediate re-opening, would provide a 1-
at the end of the ‘pandemic tunnel’ has con- 2½% hit to GDP in that quarter.
siderably brightened the outlook going into the
second half of 2021. Sectors hit by new lockdowns
As a share of total (%)
25
New restrictions will depress
20
activity in the near term. But 15
the vaccine breakthrough has 10
considerably improved the 5
prospects for a strong pick-up 0
US Euro area US Euro area
in aggregate demand in the
second half of next year Gross Value Added Employment
Retail trade (excl. food)
Winter has come early Entertainment & Recreation
Accommodation & Food Services
New Covid-19 infections have risen very rap-
idly in the last few months in both Europe and Source: Macrobond, J. Safra Sarasin, 16.11.2020
the US. Authorities in many European coun-
tries have re-imposed various forms of na- A medical breakthrough in record time
tional lockdowns, targeting hospitality and en- Scientists appear to have found a path out of
tertainment sectors, and in some cases non- the pandemic. Late-stage trials suggest that
essential stores. While new cases appear to vaccines developed by BioNTech/Pfizer and
have peaked, governments will take a Moderna are close to 95% effective, a true
Global View | 5
Economic Outlook
achievement. One drawback is that these vac- is avoided – as we expect – President Trump
cines need to be kept under extremely cold will remain in power for two more months.
temperatures, which requires a good health There could be a whirlwind of recrimination,
infrastructure. But others that have shown executive action and efforts to make govern-
promising results are more robust under nor- ing more difficult for President-elect Joe Biden.
mal temperatures, and should be more easily In addition, the Senate’s colour will not be
deployable in countries with a less developed known until 5 January, after the Georgia runoff
infrastructure. Antibody treatments that are elections. One of the implications is that this
designed to boost patients’ immune systems ‘lame duck’ Congress may not be able to agree
are being approved too, which should help vul- on a new fiscal stimulus. Yet policy uncertainty
nerable people avoid hospitalisation. is likely to drop once the new Congress sits on
3 January and Mr. Biden is sworn in. The Sen-
Policy uncertainty will remain ate will probably remain under Republican
elevated at least until control, but a new pandemic emergency relief
President-elect Joe Biden is bill should pass more easily. With the prospect
sworn in, but should drop of an effective vaccine, the policy objective will
thereafter. Congress is likely be to build a shorter bridge rather than provid-
to pass a new fiscal package ing a ‘blank cheque’. The $1.1tn HEALS act, a
early next year, the fight bill introduced by Republican senators this
against the pandemic should summer, could form the basis for the new
become more coherent and package. An infrastructure bill could also go
trade policy less erratic, through later in the year as this has enough bi-
which should help boost partisan support. The US fiscal impulse in
global trade 2021, however, is likely to be neutral; i.e. it
won’t add to nor detract from growth.
It will take some time to reach herd immunity
as roughly 60% of the world population – that A neutral US fiscal impulse in 2021
is 4.7bn people – need to be immunised for US budget balance projections (% of GDP)
the virus to stop circulating. Pfizer expects to 0
produce 1.3bn doses by the end of next year -5
(immunity requires two injections). Moderna
-10
hopes to produce up to 1bn doses in 2021.
Governments will therefore need to prioritise -15
allocation to vulnerable people and health -20
workers. Among those that will not get vac- FY 2020 FY 2021 FY 2022 FY 2023 FY 2024
cinated, social distancing and mask-wearing Baseline*
Baseline + HEALS
will need to remain in place to keep transmis-
Baseline + HEALS + some infrastructure
sion low. Nonetheless, strains on the health
system should be more manageable next year, Source: CBO, BCA, J. Safra Sarasin, 16.11.2020
allowing the economy to regain some form of
normalcy faster than previously anticipated. Trade policy should become more predictable
too. A Biden administration will remain tough
A more predictable policy environment on China, and will probably maintain an ag-
Policy uncertainty will remain elevated at least gressive industrial policy to “rebuild US do-
until 20 January 2021, when the new US Pres- mestic manufacturing capacity”. But it will not
ident is sworn in. There is still a small probabil- start new trade wars. The confrontational style
ity that some of the electoral votes could be re- that Mr. Trump has favoured will disappear.
versed, leading to a contested election. If this Joe Biden will try to repair alliances and undo
6 | Global View
Economic Outlook
the damage that his predecessor has inflicted were to roll over in the meantime. A more pre-
on international organisations, such as the dictable US trade policy should also support
World Trade Organisation. Moreover, a grid- global trade and manufacturing activity.
locked Congress for the next two years implies
that there will be no major tax hikes. Finally, More cyclical ‘Oomph’
Mr. Biden’s approach to fighting the pandemic Annual change (ppts) Annual change (%)
20 40
should be much more coherent than the out-
15 30
going President’s approach.
10
20
5
A broader economic recovery in 2021 10
0
The winter months will be harsh for advanced -5
0
economies. Euro area and UK GDP should -10 -10
contract this quarter, and a delayed stimulus -15 -20
in the US means its economy will probably 2008 2011 2014 2017 2020
start the year on a very weak footing. China credit impulse (adv. 12m) (LHS)
Euro area exports to China (3mma)
Inflation could surprise Source: Refinitiv, Bloomberg, J. Safra Sarasin, 16.11.2020
positively in the second half
of 2021. With central banks Central bank rates to remain at historical lows
maintaining an extremely Near-term price pressures are likely to remain
loose policy stance, bond subdued, given restrictions on activity. Yet in-
yields are likely to rise and flation could surprise on the upside in the sec-
curves should steepen ond half of 2021. Indeed, the pandemic has
pushed airlines, car-hire companies, hotels,
The outlook is much brighter from the second entertainment venues, bars and restaurants
quarter onwards. Indeed, additional income out of business or forced them to cut capacity
support for both workers and companies, and over the past 12 months. As a result, the sup-
the improved prospect of a near-term vaccine ply-side potential of advanced economies
rollout, should help to bridge this period. Com- might have shrunk. A strong pick-up in de-
panies that have lost demand ‘permanently’ in mand for these services, combined with some
the last few months – mainly those operating resource constraints in these industries,
in the leisure and hospitality sectors – will should lead to a more rapid pick-up in prices.
have an incentive to remain a ‘going concern’. A drop in permanent unemployment should
Businesses more broadly should be less in- also lead to higher ‘rent of shelter’ inflation, a
clined to delay investments. What’s more, the large component of the US core CPI basket.
release of pent-up demand from households Yet the Fed’s new average inflation targeting
that have accumulated savings should also framework and the ECB’s new symmetrical 2%
boost growth later in the year. Finally, China’s target imply that central banks will be in no
business cycle still has room to run. The credit hurry to remove monetary accommodation,
impulse tends to lead its business cycle by which should boost inflation expectations. In-
nine months and advanced economies’ ex- vestors could bring forward their expected first
ports to China by 12 months. Chinese output rate hike to before 2024, which could lead to
and the external demand of countries with a more pronounced rise in yields.
large manufacturing bases – such as Ger-
many, Italy and Switzerland – should improve Raphael Olszyna-Marzys
well into 2021, even if Chinese credit numbers International Economist
Global View | 7
Ice sculpture on frozen lake, Canada
Forex Strategy
Forex Strategy
Covid vaccine to lift euro
The approval of a vaccine should accelerate the economic recovery in 2021 and weaken the US
dollar as a countercyclical currency. By contrast, the euro should benefit from the global rebound.
Moreover, we expect that the Swiss franc and the Japanese yen should hold up well. Although
the gold price is set to maintain its current high level, we anticipate some moderate consolidation
over the course of the coming year.
Dollar should weaken further Furthermore, the US twin deficit (a budget def-
Over the past two quarters, the US dollar has icit coupled with a current account deficit) can
lost significant ground against the other major be singled out as a significant driver of the
currencies. We are convinced that the green- multi-year dollar cycles, as there is a close his-
back peaked in spring and then embarked on torical correlation between the weakness of
a longer-term downward trend, which will likely the dollar and rising twin deficits. Given the
continue in 2021. spike in unemployment caused by the current
pandemic, it seems unavoidable that addi-
US dollar is likely in a downward trend tional generous fiscal packages will be
160 passed, which should continue to produce
high budget deficits. Ultimately, President
140
Biden’s more constructive approach to global
120
trade as well as an acceleration of imports (on
100 the back of a recovering domestic economy)
80 should tend to widen the current account def-
icit even further, likely representing another
60
1980 1994 2009 2024 headwind to the US dollar.
Cyclical downs & ups
Dollar index, DXY Euro should benefit from the recovery
Linear (Dollar index, DXY)
Beyond the economic rebound of the past few
Source: Macrobond, J. Safra Sarasin, 16.11.2020 months, the euro has benefited from the
agreement reached by EU member states to
Our forecast is supported by the increasing set up a recovery plan. Markets interpreted
probability that a new Covid vaccine may soon this as a clear signal of support for a common
become available, which will likely boost the policy, which helped to significantly reduce the
economic recovery in the coming year. How- political uncertainty discount weighing on the
ever, the relatively small contribution of the ex- European common currency.
port sector to the US economy means that the
dollar should behave in a countercyclical man- In the coming year, the likely approval of one
ner and will likely depreciate in 2021. or more Covid vaccines should generate a
strong tailwind for the export-led economies of
Several other factors point to a weaker US dol- the euro area and attract more capital flows,
lar. Last spring, the coordinated interest-rate which should create a further boost for the
cuts by central banks have virtually eliminated euro. In addition, the euro should benefit from
the US dollar’s real rate advantage, which had the prospect of a more cordial transatlantic
supported the currency in the past years. trade policy.
Global View | 9Forex Strategy
The expected recovery is positive for the euro should in turn provide a boost to the Japanese
1.8 4 currency. The real interest rate on Japanese
government bonds continues to be attractive
as well, owing to persistently low inflation
1.4 0
rates. Finally, the Japanese yen should also
benefit from phases of temporary volatility on
1.0 -4
financial markets.
0.6 -8 Current health crisis to limit sterling upside
1980 1990 2000 2010 2020
By contrast, sterling’s performance is likely to
EUR-USD, lhs depend on two key factors. On the one hand,
Euro area - US GDP growth differential, rhs
the outcome of the negotiations for a post-
Source: Macrobond, J. Safra Sarasin, 16.11.2020 Brexit trade deal will have a major impact on
the future growth path of the British economy.
No sign of a weaker Swiss franc On the other hand, the Covid pandemic has hit
Despite a stronger euro, the Swiss franc still the country harder than most of its neigh-
faces upward pressure. This is illustrated in bours. In view of this, the Bank of England is
particular by the rapid growth of sight deposits likely to take further steps in the direction of
held with the Swiss National Bank, which can quantitative easing over the coming months in
be interpreted as a barometer for the volume a move to shore up the crisis-hit economy. This
of the SNB’s interventions in the currency mar- could put further downward pressure on real
ket. Over the course of 2021, the Swiss franc interest rates, which should limit the upside
should remain strong on the back of attractive potential of sterling, despite the expected con-
real interest rates, structural advantages and clusion of a trade agreement with the EU.
its role as a safe-haven currency.
Gold price to stay high
Japanese yen rides out the storm The gold price is likely to remain high, due to
The prospects for the Japanese yen are prom- persistently low real interest rates and the an-
ising. Thanks to extremely low infection rates, ticipated weakening of the US dollar. Yet the
Japan has so far managed to contain the approval of a vaccine should significantly re-
health crisis without a national lockdown, duce the uncertainty that has dogged financial
which will likely be reflected in less negative markets. On balance, we expect a consolida-
levels of economic growth. At the same time, tion of the gold price over the course of 2021.
the growing importance of China as an export
destination makes Japan’s domestic economy Dr Claudio Wewel
more resilient to the global crisis, which FX Strategist
10 | Global ViewFixed Income Strategy
Fixed Income Strategy
Inflation expectations to rise in 2021
Loose financial conditions and continued fiscal stimulus measures should ensure that the global
economy improves further in 2021, in particular if the prospect for a timelier and more effective
vaccine comes to fruition. Rising inflation expectations should lead to moderately higher bond
yields and steeper yield curves in 2021. Central banks will continue to provide significant mone-
tary accommodation and will likely lean against a meaningful rise in real yields.
Inflation expectations to pick up in 2021 Global central banks are willing to let inflation
The negative economic effects induced by overshoot. They will not pre-emptively raise
the Covid-19 pandemic will keep uncertainty policy rates, hence these rates will likely re-
high in the near term. However, the potential main at current low levels for an extended pe-
for vaccines with an effectiveness above riod of time. This strengthens the case for
90% increases the likelihood that 2021 will higher inflation expectations in 2021.
bring relief for the global economy.
Policy rates will likely remain low
Moreover, global real policy rates have been 2.50
Implied policy rates in 3y
cut to deeply negative levels and an unprece- 2.00
dented amount of fiscal stimulus has been 1.50
deployed to protect developed markets’ 1.00
economies from the impact of the pandemic. 0.50
Therefore, the prospect for a significant im- 0.00
provement in global economic activity in -0.50
2021 looks promising once the headwinds -1.00
from the Covid-19 pandemic subside. This is Jan 19 Mai 19 Sep 19 Jan 20 Mai 20 Sep 20
reflected in market-based inflation expecta- JPY CHF GBP
tions which have already recovered strongly EUR USD
from the lows. Source: Bloomberg, J. Safra Sarasin, 16.11.2020
Inflation expectations have recovered from The likely outcome of the US election (Biden
the lows president, split congress) will diminish policy
uncertainty although the new government will
2.00
have less leeway to implement its agenda.
1.50 President Biden’s approach to global trade
should be less disruptive than under Donald
1.00 Trump and more beneficial for global growth.
0.50
Developed markets’ real yields to stay low
0.00
The level of debt/GDP in developed countries
Jan-20 Apr-20 Jul-20 Nov-20 has risen strongly, also as a result of the
US 10-year inf. exp. (TIPS) strong fiscal response to combat the negative
Germany 10-year inf. exp. (TIPS) economic effects from the pandemic. It will be
essential to keep real interest rates lower than
Source: Macrobond, J. Safra Sarasin, 16.11.2020 usual (or preferably negative) for an extended
Global View | 11Fixed Income Strategy
period of time. Only then will developed mar- curve has already exhibited a steepening trend
kets’ economies be able to sustain the high in 2020, which was most pronounced at the
debt levels. Consequently, we expect central very long end of the yield curve.
banks to lean against a strong rise in real
yields. Most of the forecast increase in bond The US yield curve is already steepening
yields for 2021 will therefore be driven by ris- 80 150
ing inflation expectations.
60
100
US – economic rebound with near-term risks
40
After a record contraction in Q2 2020, the
US economy rebounded sharply in the third 50
20
quarter, led by a strong manufacturing sec-
tor. While the services sector also bounced 0 0
back, it continues to face headwinds from Jan-20 Apr-20 Aug-20 Dec-20
the Corona pandemic. As a vaccine will likely US 2y/10y steepness (bp)
be available in the first half of 2021, we ex- US 5y/30y steepness (bp, r.h.s)
pect the services sector to regain a strong Source: Macrobond, J. Safra Sarasin, 16.11.2020
footing.
We expect the Fed to err on the side of cau-
With the introduction of Average Inflation Tar- tion, even if there is an increased likelihood
geting (AIT), the Fed made it clear that it will of a timely vaccine. It will accept a rise in
not pre-emptively lift policy rates, but will only yields along with higher inflation expecta-
do so after inflation has started to rise mean- tions. However, a premature rise in real
ingfully. The objective is to let inflation over- yields would lead to unwanted tightening of
shoot, hence the Fed will likely tolerate a core financial conditions and would provoke a
PCE rate above 2% for several quarters. swift reaction. The Fed will continue to use
forward guidance and could shift asset pur-
US inflation expectations should rise as the chases to longer maturities with a particular
global economy recovers focus on purchasing TIPS. We therefore an-
0.80 ticipate a modest increase in Treasury yields
over the next 6 to 12 months.
0.30
Euro area – policy to remain extremely ac-
-0.20 commodative
The European Central Bank (ECB) has not
-0.70 managed to even come close to attaining its
2009 2013 2016 2020 inflation target despite delivering substantial
3m change 10-year breakeven inflation monetary accommodation for the past years.
Fitted line (3m change ISM, commodities, Fed Low inflation expectations are firmly en-
TIPS holdings) trenched in the euro area, and it will be a diffi-
Source: Bloomberg, J. Safra Sarasin, 16.11.2020 cult and lengthy process for the ECB to con-
vince market participants that it can generate
We therefore expect the US yield curve to sustainable inflation. The ECB will therefore
steepen further as stronger expected growth continue to have an easing bias and continue
and rising commodity prices should lead to to provide extreme monetary accommodation,
higher inflation expectations. The US yield mainly through asset purchases.
12 | Global ViewFixed Income Strategy
The ECB has not achieved its inflation target The European periphery will continue to bene-
2.50 fit from continued strong monetary support by
the ECB, which will want to ensure a smooth
2.00
transmission of its monetary policy to all re-
gions, sectors and jurisdictions. Conse-
1.50
quently, we expect euro area peripheral
1.00 spreads to tighten further in 2021.
0.50 UK – future trade relations less integrated
2016 2017 2019 2020
Whatever the outcome of the EU/UK trade ne-
EU inflation swap 5y5y (%)
gotiations will be, a hard Brexit or a negotiated
ECB long term inflation objective
settlement, future trade relations with the EU
Source: Bloomberg, J. Safra Sarasin, 16.11.2020 will become less integrated and will likely
prove to be a significant headwind for UK eco-
The strong fiscal stimulus measures to miti- nomic growth. While overcoming the negative
gate the negative economic impact have led to economic effects from the Covid-19 pandemic
a large increase in public debt for member will be a difficult task, the prospect for a time-
states and hence large euro area government lier and more effective vaccine in 2021 could
bond (EGB) issuance. However, the ECB will herald a relief for the service-oriented UK
have purchased more bonds in 2020 than the economy. Gilt yields will likely rise moderately,
total net EGB supply. This pattern is expected with a steeper curve, over the next 6- to 12
to repeat again in 2021, which has contrib- months as stronger global growth should raise
uted significantly to the continued yield curve inflation expectations. The Bank of England
flattening seen in core euro area government will need to purchase substantial amounts of
bonds over the past 12 months. future Gilt issuance to prevent excessive rises
in (real) government bond yields. The large in-
Euro area core curves have flattened in 2020 crease in public debt in the UK requires low
50 100 real yields to make the debt load sustainable.
40 80
Japan – no policy change expected
30 60 We expect no substantial change in policy
20 40 from the Bank of Japan (BoJ) in 2021. It will
continue its policy of purchasing Japanese
10 20
government bonds (JGBs), corporate bonds
0 0 and equities to ensure a smooth transmission
Jan-20 Apr-20 Aug-20 Dec-20 of its monetary policy. The BoJ will maintain
Germany 2y/10y steepness (bp) its yield curve control with a tight target corri-
Germany 5y/30y steepness (bp, r.h.s)
dor around the zero level for the 10-year sec-
Source: Macrobond, J. Safra Sarasin, 16.11.2020 tor, and some wanted curve steepness in ul-
tralong maturities will remain in place. We
As the global economy is poised to gather continue to expect current yield levels to per-
steam in 2021, we expect euro area inflation sist for an extended period of time.
expectations to pick up. We forecast govern-
ment bond yields to rise moderately over the Alex Rohner
next 6- to 12 months with steeper yield curves. Fixed Income Strategist
Global View | 13Central Hall of the Ice Hotel in Jukkasjärvi, Sweden
Equity Strategy
Equity Strategy
The big (earnings) comeback
In 2020, the equity market has been put on life support with the help of fiscal stimulus pro-
grammes and monetary easing. As a result, equities have undergone a remarkable re-rating,
which has so far only been supported by strong profits in Emerging Markets and the technology
sector. We think that some of the developments we have seen in 2020 will reverse in 2021
providing an environment that allows the laggards of the past 12 months to catch up with the
rest of the market. That would include mostly value names as well as European equities. Over
the long-term, however, we continue to expect the highest returns in areas that are plays on
global consumption growth and innovative strength, namely EM equities and technology stocks.
Earnings to carry performance in 2021 combined with (b) a concerted effort by devel-
The moves in equity markets in 2020 were oped market central banks to avoid liquidity
marked by large swings in valuations, which shortages on the one hand and provide ample
had been key to the rally after the Covid-led monetary stimulus on the other. Fiscal support
sell-off in the first quarter. The price-to-earn- allowed markets to look through the economic
ings ratio of global equities has covered a impact from the first Covid wave while mone-
record wide range, from a low-point at 12x tary easing lead to a sharp drop in global inter-
(on 12-month forward earnings) in March to est rates and lifted asset prices across the
a peak at 21x at the end of August – a 75% board.
re-rating!
Going forward, the equity market will have to
Lower real yields have lifted valuations stand on its own feet as central banks won’t
21 -1.6 be able to pull off the same trick twice. The im-
-1.1 plications for equities are that earnings growth
19
will have to do the heavy lifting, as valuation
-0.6
17 multiples at the global level are unlikely to rise
-0.1 from here.
15
0.4
13 0.9
The outlook, however, is not bad. Earnings
have started to bounce back and surprised
11 1.4
strongly in the second and third quarter of
2016 2017 2018 2019 2020
Global price-to-earnings ratio
2020, with US technology companies proving
US 10-year real yield, %, inverted, rhs once again why they deserve the praise they
Source: Refinitv, J. Safra Sarasin 16.11.2020 have received in recent years. In the third
quarter, the US technology sector, including
This revaluation has helped global equities to names such as Apple, Alphabet, Facebook and
rise by around 7% since the beginning of the Microsoft, managed to deliver 5% earnings
year - before the pandemic started – quite re- growth over Q3 2019, while the rest of the US
markable, considering that global earnings de- index saw its earnings decline by almost 13%.
clined by 12% over the same period. Two fac- The ability of technology firms, not only in the
tors have been crucial for this development: US, to deliver stable and superior returns is
(a) an unprecedented global fiscal response in unlikely to change in the years to come. Con-
terms of size, breadth and reaction time, sequently, we think they should be and remain
Global View | 15Equity Strategy
a cornerstone of every long-term investment in EM is a play on EM Asia and technology
the global equity market. Regionally, we think Emerging Markets (EM)
equities are set to deliver the highest returns,
Big technology names have outperformed not only in the year ahead, but for years to
160 come. One reason for the solid outlook, is the
structure of the Emerging Markets equity in-
140
dex, which has changed fundamentally over
120
the past years. While EM Asia accounted for
100 only 50% of EM market capitalisation before
the crisis in 2009, its share has risen to more
80
than 80% today, with LatAm (Latin America)
60 and EMEA (Europe, Middle East, Africa) ac-
Jan-20 Apr-20 Jul-20 Oct-20
counting for the other 20%.
FAANG + MS Nasdaq
US (ex FAANG + MS) MSCI EMU
More than ever, EM is a play on EM Asia
Source: Refinitv, J. Safra Sarasin 16.11.2020 MSCI EM, market capitalisation by region
100%
90% EMEA
Over the short term, however, other sectors
80%
may manage to outperform technology 70%
names. This comes against the backdrop of 60% LatAm
rising rates and an improving global macro 50%
outlook, which may hurt tech valuations more 40%
EM
30% Asia
than others in the short term. These develop-
20%
ments are reinforced by the prospect for a 10%
broad roll-out of a vaccine in 2021, which 0%
raises the probability that a major risk to the 2008 Currently
global economy will be removed, namely a Source: Refinitv, J. Safra Sarasin 16.11.2020
never-ending cycle of rising Covid infection
numbers and corresponding lockdown Equivalently, the sector composition of Emerg-
measures. With these risks diminished, a solid ing Markets equities has changed. It used to
recovery in 2021 appears all but given. be a market heavily geared to commodities,
with energy and materials accounting for more
While a full return to pre-Covid may remain than one third of market capitalisation in 2008
elusive in various areas, a vaccine should re- (and 40% of earnings). Since then, the com-
verse many developments we have experi- bined share of the two sectors has dropped to
enced in 2020. Investors should account for only 12% of market capitalisation (15% of
this and tactically position through increased earnings). As commodity-related sectors have
exposure to sectors that have seen the sharp- seen their weights decline, technology and
est decline in earnings since late 2019, and online sectors have gained.
are now offering the largest rebound potential
as demand normalises. Two sectors which we What are the implications of these shifts for
would highlight are: (a) industrials, with earn- EM equity returns? As a result, EM equities do
ings still 22% below late 2019 levels, and (b) not only provide significant exposure to EM
energy, a sector whose earnings have fallen by Asia, the region with the most dynamic eco-
59% since the beginning of 2020. Both these nomic outlook for the coming decade, but the
sectors are trading at a substantial discount to large exposure to tech names also keeps dis-
their historical averages, suggesting that a re- ruption risks manageable. Ten years ago this
turn to normal is not yet priced. would have been different. Energy is set
16 | Global ViewEquity Strategy
struggle for years to come, in our view, as a de- Catch-up potential for Covid laggards
cline in fossil fuel consumption appears all but Yet, euro area equities could still manage to
inevitable – a development we do not only re- catch up, given moderate valuations, in partic-
gard likely, but also necessary to combat cli- ular compared to the US. They appear to be
mate change. priced for a lot less in terms of macro upside,
standing to benefit from an improving macro
Strong outlook for EM earnings backdrop after winter has passed. However,
The favourable outlook for Emerging Markets our preferred play on a Covid recovery is the
equities next year is also reflected by consen- UK, which has suffered from the pandemic
sus earnings expectations. Considering that more than other markets, a result of its unfor-
the sharp drop in 2020 earnings is distorting tunate exposure to various (usually uncorre-
2021 growth numbers, we look at the two-year lated) sectors, that have all been hit hard by
growth rate since 2019. EM companies are set the virus, such as aerospace, travel, consumer
to deliver 2021 earnings at a staggering 22% services, commercial real estate and energy.
above their 2019 levels, brushing aside the As a result, the UK remains one of the few can-
Covid slowdown. This compares to a picture in didates for a tactical re-rating going into 2021.
developed markets, which looks markedly
more subdued. Although US earnings are set UK valuations are trailing the rest of the world
to recover their 2020 losses in 2021, they will Price-to-earnings ratio
24
only exceed their 2019 levels by 6%, reflecting
the fact that the US recovery has not been re- 21
markable outside the tech sector. In Europe, 18
euro area equities have not only been hit hard
15
by the virus, but also lack significant exposure
to tech and online retail which benefit from 12
Covid-led behavioural changes. As a result, 9
earnings in the euro area will take one more Jan-20 Apr-20 Jul-20 Oct-20
US EMU
year, until 2022, to rise back above pre-Covid Emerging Markets Switzerland
levels of 2019. UK
Source: Refinitv, J. Safra Sarasin 16.11.2020
EM earnings show no signs of crisis
25% This rebound, however, does not protect UK
Earnings 2021 vs. 2019
20%
equities from the structural challenges they
15%
10%
are facing over the longer term, as they have
5% the highest weighting in energy and materials
0% among major markets. In the long-term, earn-
-5%
ings growth matters, and this will likely be
-10%
-15%
found in Emerging Markets and at innovative,
-20% high margin technology firms.
World
US
UK
EM
Switzerland
Euro area
Wolf von Rotberg
Source: Refinitv, J. Safra Sarasin 16.11.2020 Equity Strategist
Global View | 17Lighthouse St. Joseph North Pier, Benton Harbour, Michigan, United States
Sustainability Focus
Sustainability Focus
A “Decade of Action” to deliver the
UN’s Sustainable Development Goals
The UN Sustainable Development Goals (SDGs), which were launched in 2015, represent the
member states’ shared vision of the broader development objectives that the World has as a
society. The global community of countries made clear that it will heavily rely on the private sector
to solve some of the most urgent problems the world is facing. For investors, this transition of the
global economy to a more sustainable pathway, creates a number of opportunities!
UN SDGs – the global strategy for economic,
social and environmental development
The 2030 Agenda for Sustainable Develop-
ment adopted by all United Nations Member
States in 2015 provides a shared blue-print
for peace and prosperity for people and the
planet. At the heart of this agenda are the so-
called Sustainable Development Goals
(SDGs). They are made up of a collection of 17
global goals, which are then further specified
by 169 underlying, detailed targets. mates that meeting the SDGs will require
US$2.5 trillion in investment each year from
The Sustainable Development 2015 to 2030. It further states that there is
Agenda for 2030: 17 goals, currently about US$256 trillion in private
169 detailed, underlying wealth in the global capital markets, which
targets. means that just 1% of that amount would have
to be invested in a targeted way to fulfil the re-
In summary, the Sustainable Development quirement. While this is absolutely doable,
Goals represent an articulation of the world’s COVID-19 represents a clear set-back for the
most pressing sustainability issues and act as global development agenda: while the pan-
THE global framework for sustainable develop- demic continues to spread across the globe,
ment. The SDGs build on decades of work by the poorest and most vulnerable populations
countries and the UN and are also aimed at the are being impacted the most and face the
private sector. Both companies and (institu- greatest socio-economic risks.
tional) investors are encouraged to contribute
to the SDGs through their business activities, Covid-19 acts as an inhibiting
asset allocation and investment decisions. factor to the global
development agenda.
“Decade for action” – ten years to transform
the world Whereas the global pandemic will be under
The SDG call for human and planetary wellbe- control at some point in the future, it will likely
ing comes with a specific deadline: 2030. The accelerate an even greater requirement for
UN Development Programme (UNDP) esti- capital direction towards the SDGs.
Global View | 19Sustainability Focus
Attractive investment opportunities driving Preserving Natural Capital
economic growth Fulfilling Basic Needs
Achieving the SDGs will be a key driver of eco- Achieving the Energy Transition
nomic growth going forward, which ultimately Empowering People
is the only structural source of long-term finan-
cial returns. Therefore, from a macro point of While not all SDGs offer direct investment
view, universal institutional asset owners de- opportunities based on their products and
pend on sustainable economies and markets services, for the majority of them we were
to achieve their desired returns. From a micro- able to deduct concrete solutions that we
economic point of view, companies that pro- grouped into twelve concrete sub-themes.
vide solutions to those sustainability chal-
lenges are likely to offer attractive investment Turning sustainability
opportunities. Finally, regulatory pushes in a challenges into market
number of sectors (e.g. the EU Green New solutions is a powerful driver
Deal) as well as the attempt of investors to for innovation and long-term
show their contribution to solving real-world is- business opportunities
sues will act as another tailwind.
The SDG engine is designed not only to find
Our SDG engine – turning sustainability chal- direct SDG solutions focused companies,
lenges into market solutions but also those that are transitioning strate-
In order to systematically identify interesting gically to more sustainable business mod-
opportunities, we created a proprietary SDG els. This allows not only to systematically
engine. An in-depth assessment of the 17 screen for established companies with sig-
SDGs allows us to build a comprehensive nificant SDG revenue streams, but also for
mapping of products & services that directly significant opportunities in smaller and
support the achievement of the goals. In sum- emerging companies whose offerings will
mary, the SDGs address four environmental help to close the global sustainable devel-
and social challenges: opment gap.
Proprietary SDG Categories and Sub-Themes
Source: Sustainable Investment Research, Bank J. Safra Sarasin
20 | Global ViewSustainability Focus
Long-term thinking and engaging for perfor- to expedite the overall SDG agenda as well.
mance and positive outcomes Our targeted engagement is designed to
Engagement and proxy vot- strengthen our investment cases and to con-
ing (together: “Active Own- tribute further to the successful achievement
ership”) are crucial tools for of the SDGs (going beyond traditional ESG en-
sustainable investors who gagement).
are aiming at influencing
company behavior. Besides capital allocation Creating the future now – a chance for inves-
to best-in-class organisations with exposure tors to contribute to the global development
to SDG solutions, engaging with investee com- agenda
panies represents a second option to generate In general, we believe that a focus on SDG
positive societal and environmental outcomes outcomes not only broadens our sustainabil-
in listed asset classes. Understanding compa- ity (ESG) analysis within our investment pro-
nies and their business models holistically is cesses, but also helps to include analysis el-
necessary to finally be in a position to create ements that relate to the most important out-
positive societal and environmental out- comes to society and our planet on a sys-
comes. Longer-term ownership is a supportive temic level. By integrating the Sustainable
condition in order to ensure the effectiveness Development Goals agenda in our invest-
of our engagement dialogues and proxy voting ment analysis, we can further understand the
activities. opportunities that are likely to exist in the
transition to an SDG-aligned world. Overall,
While SDG 17 (“Partnership the SDG framework provides an excellent
for the goals”) is not directly way of seeking returns while contributing to
investable, we will actively positive environmental and social outcomes
use the Active Ownership for investors.
tool not only to make better
informed investment decisions, change com- Andrea Weber, CAIA
pany behaviour an protect clients’ capital, but Sustainable Investment Analyst
Global View | 21Asset Allocation
Asset Allocation
The return of predictability
Thomas Bollinger has worked for Bank J. Safra Sarasin since 2011, and since 2020, his role has
been Senior Investment Strategist in the CIO Office. He is responsible for providing input to the
Investment Committee and implementing the tactical allocation across the different mandate
profiles. In his previous role with J. Safra Sarasin he was in charge of developing and implement-
ing quantitative investment strategies. Before joining J. Safra Sarasin he worked in the fields of
investment advisory and risk management. Thomas Bollinger has a PhD in financial market the-
ory from the University of Basel and is a Chartered Alternative Investment Analyst (CAIA). We
spoke with him about the most important issues currently affecting asset allocation.
Global View: Mr Bollinger, we that the US stock market would eventually re-
are coming to the end of a bound to a new peak in late summer.
highly unusual year. Can you
still recall the situation a year GV: How was such a rapid market recovery
ago? possible?
I certainly can. At the start of The intervention of central banks was key.
the year, most market participants were pre- Along with the lockdowns, however, govern-
occupied with the performance of the global ments passed a wide range of measures to
economy and geopolitical concerns about the cushion the economic damage and stabilise
relationship between China and the US. In the credit markets. Although this did not prevent
very first months, there were growing signs of the downturn, it provided the conditions for a
an economic recovery and the US stock mar- rapid recovery later. It is also worth mentioning
ket had hit a new peak by mid-February. And how the economy adapted to the new circum-
then the coronavirus crisis erupted, throwing stances through remote working from home,
the entire world into disarray within a very reconfiguring supply chains and revising ser-
short time. The fact that barely anyone now re- vice offerings. Such flexibility has also made a
members major events such as the move to significant contribution towards stabilising the
impeach US President Trump or the cancella- economy.
tion of the summer Olympic Games in Tokyo is
a good indication of the huge upheaval the GV: Have the markets got too far ahead of the
pandemic has caused. economy?
A downturn of the economy is always followed
GV: How did the market perform in the by a recovery. Markets try to anticipate this de-
spring? velopment. The key question is how swift and
Prices started to plunge in the second half of strong this recovery turns out to be. The rapid
February, wiping out the gains that stock mar- improvement in markets does not mean that
kets had made in previous years. It was the the growth dip experienced in the second
biggest price correction since the global finan- quarter will be made good by the end of the
cial crisis and one of the fastest market col- year. In fact, the way the market is moving
lapses ever. However, central banks re- fuels hope that the economic indicators have
sponded swiftly with interest rate cuts and improved to a degree that suggests a sustain-
bond purchasing programmes to shore up the able recovery lies ahead. There have repeat-
market. Very few people expected at the time edly been mixed signals, however. But that’s
22 | Global ViewAsset Allocation
not unusual in the early phase of an economic GV: What about bonds?
cycle. The level of uncertainty, measured by The low rate environment presents a particu-
implied volatilities, was unusually high over lar challenge for asset allocation. The low
the course of the entire summer. As a result, yields to maturity can be wiped out by a mod-
caution was certainly necessary during this erate rise in interest rates. The prospect for
period as regards asset allocation. moderately higher bond yields therefore con-
firms our underweight position in govern-
GV: How has the outcome of the US elections ment bonds. However, we think corporate
and the announcement of a vaccine affected bonds and emerging-market bonds look at-
market volatility? tractive due to their higher yields and we are
Volatility has come down but is still well above therefore overweight in these segments. We
normal levels. This is not surprising as implied continue to keep a close eye on inflation ex-
volatility in recent months was already ele- pectations, which are likely to rise as the re-
vated for the period far beyond the election covery gains traction. Future decisions on our
date and well into 2021. Nevertheless, both bond positions will be influenced by inflation
the course of the pandemic and the political trends.
situation seem to be more predictable than a
few months ago. The availability of a vaccine GV: What makes you think that 2021 will not
suggests it will be possible to control the pan- simply be a repeat of 2020?
demic much more effectively as early as next Quite a few things, fortunately. The uncertainty
spring. This should provide a solid foundation created by the two major themes of the past
for the economic recovery. year – the pandemic and the US elections –
has significantly decreased. On top of that
GV: Let’s talk about the positioning of the comes the support provided by central banks
portfolios. What are the dominant themes for and fiscal policy. We therefore expect volatili-
equities? ties to continue to normalise in 2021. This is
It is reasonable to assume that the low point supportive for riskier assets such as equities
in the second quarter of 2020 represents the and corporate bonds. Even though the world is
start of a new economic growth cycle. We are currently still fighting the second wave of the
likely in a recovery phase and since last spring Covid pandemic, the economic recovery is not
have gradually increased the risk exposure of under threat – in the medium term at least.
our portfolios. Solid company figures have val- The conclusion of the US election battle
idated our positioning. Within equities, there is should help to shift the focus away from per-
a shift away from growth stocks, which partic- sonalities to fundamentals. Although the fu-
ularly benefit from low interest rates, into cycli- ture still presents risks, we expect a much
cal stocks. In the current market environment, higher level of predictability.
we think emerging-market equities are more
attractive than those of developed countries. GV: Thank you for talking to us, Mr Bollinger.
Global View | 23Market & Forecast Overview
Market & Forecast Overview
Market & Forecast Overview
Macroeconomic Forecasts
In % 2020 2021 2022
USA Economic growth ch an. -3.5 4.5 3.3
Inflation ch av. 1.2 1.9 2.3
Euroland Economic growth ch an. -6.9 4.4 3.8
Inflation ch av. 0.2 0.5 1.0
Switzerland Economic growth ch an. -3.9 3.0 3.9
Inflation ch av. -0.7 0.0 0.7
UK Economic growth ch an. -11.2 6.1 5.1
Inflation ch av. 0.9 1.2 1.7
Japan Economic growth ch an. -5.4 3.5 2.4
Inflation ch av. 0.2 0.3 0.8
China Economic growth ch an. 2.2 8.2 5.4
Inflation ch av. 2.7 2.0 2.5
Source: Datastream, J. Safra Sarasin, 25.11.2020
Policy rate forecasts in %
24.11. 1Q21 2Q21 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: Datastream, J. Safra Sarasin, 25.11.2020
10 year bond yield in %
24.11. 1Q21 2Q21 4Q21
USA 0.85 1.15 1.20 1.30
Germany -0.58 -0.40 -0.35 -0.25
Switzerland -0.52 -0.50 -0.50 -0.40
UK 0.35 0.40 0.45 0.50
Japan 0.01 -0.10 -0.05 0.00
Source: Datastream, J. Safra Sarasin, 25.11.2020
FX-Forecasts
24.11. 1Q21 2Q21 4Q21
EUR-CHF 1.08 1.08 1.08 1.08
EUR-USD 1.18 1.22 1.23 1.25
EUR-GBP 0.89 0.90 0.90 0.90
USD-JPY 104.6 103.5 103.0 102.0
USD-CHF 0.91 0.89 0.88 0.86
USD-CNY 6.57 6.68 6.65 6.60
Source: Datastream, J. Safra Sarasin, 25.11.2020
24 | Global ViewMarket & Forecast Overview
Stock index price forecasts
24.11. P/E ratio Dec-20 Dec-21
USA
S&P 500 3’635 22.0 3’600 4‘000
Nasdaq 100 12’080 27.5 12’500 13‘500
Europe
FTSE 100 6’432 14.6 6‘200 7‘200
DJ Euro Stoxx 50 3‘508 17.5 3‘400 3‘800
DAX 13‘292 15.1 13‘500 14‘500
SMI 10‘492 17.4 10‘500 11‘400
SPI 12‘992 18.6 13’750 14’100
SMIM (Swiss Mid-Caps) 2‘733 16.1 2‘700 2‘950
Japan
MSCI Japan 1‘073 16.7 1’050 1’150
Emerging Markets
MSCI EM 1’226 12.1 1’250 1’400
MSCI China 108 14.8 110 125
Source: Datastream, J. Safra Sarasin, 25.11.2020
Equity Strategy Asset Allocation
Regions Sectors Asset Classes Position
Bonds –
USA Overweight Industrials
China Information Technology Government Bonds – –
EM Communication Services IG Corporate Bonds +
UK Energy High Yield Bonds +
EM Bonds +
Euroland Neutral Real Estate
Equities +
Japan Materials
Developed Markets +
Consumer Discretionary
Banks Emerging Markets +
Insurance
Liquidity =
Alternatives +
Switzerland Underweight Consumer Staples Convertible Bonds +
Health Care
Other Alternatives =
Utilities
Source: J. Safra Sarasin, 25.11.2020 Source: J. Safra Sarasin, 25.11.2020
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
Andrea Weber
Sustainable Investment Analyst
+41 (0)58 317 4366
andrea.weber@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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