Nordea Boutiques Economic Outlook 2021 - nordea. lu
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Advertising material for professional investors only, investing for their own account – according to MiFID definition
Nordea Boutiques
Economic Outlook 2021
Content Macro.................................................................................................................................................................................2 ESG......................................................................................................................................................................................3 Asset Allocation...........................................................................................................................................................5 Nordic Equities.............................................................................................................................................................7 European Equities..................................................................................................................................................... 8 North American Equities....................................................................................................................................... 9 Emerging Market Equities..................................................................................................................................11 Asian Equities............................................................................................................................................................ 13 Indian Equities........................................................................................................................................................... 14 Latin American Equities...................................................................................................................................... 15 Listed Infrastructure............................................................................................................................................... 16 Global Real Estate................................................................................................................................................... 18 Nordic Fixed Income............................................................................................................................................. 19 European Covered Bonds..................................................................................................................................20 European High Yield Bonds.............................................................................................................................. 21 US Investment Grade Corporate Bonds....................................................................................................22 US High Yield Bonds.............................................................................................................................................23 US Mortgage Backed Securities....................................................................................................................24 Emerging Market Debt........................................................................................................................................25 Emerging Market Corporate Debt................................................................................................................26 Renminbi Bonds....................................................................................................................................................... 27
Introduction Economic Outlook 2021 Each year, we compile the investment outlooks for the coming year from our various internal and external boutiques. We are pleased to share this 2021 collection of outlooks on each boutique’s respective asset class with you. We thank you, valued client, for investing with Nordea and wish you a successful 2021. Asset Management at Nordea As an active investment manager, Nordea Asset Management manages asset classes across the full in- vestment spectrum and aims to serve its clients in every market condition. Nordea’s success is based on a sustainable and unique multi-boutique approach that combines the expertise of specialized internal boutiques with exclusive external competences allowing us to deliver alpha in a stable way for the benefit of our clients. Internal boutiques External boutiques We have established segregated teams for Nordea External Partners team aims to meet key asset classes, allowing each team to focus investor needs by selecting best-of-breed on their primary activity: managing money. asset managers who can generate alpha in This means retaining competence centres that specific regions or asset classes. The rationale leave freedom to the investment managers. In is to concentrate on boutiques focused purely addition to our Nordic expertise, we have built on money management in the belief that fund well-established track records over the years distribution distracts investment managers in both equity and fixed income strategies from their primary objective: generating ranging from Credit and Covered bonds to exceptional investment performance. Global, European and Emerging Markets equities as well as Multi-Assets Solutions.
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020f 2020f 2021f 2022f 0.6
(ex-airports)
3.5% Cutline 1 Cutline 2
110
3.0% No
0.4
3.5%
2.5% 120
3.0% No 0.2
2.0%
2.5%
Macro 1.5%
2.0%
1.0%
1.5%
ESG 0.0
´97 ´98 ´99 ´00 ´01 ´02 ´03 ´04 ´05 ´06 ´07 ´08 ´09 ´10 ´11 ´12 ´13 ´14 ´15 ´16 ´17 ´18 ´19 ´20
MSCI UM/US (lhs) Broad Nominal Dollar (reverse rhs)
130
0.5%
1.0% 21
0.0%
0.5%
Jul-14 Nov-14 Nov-15 Nov-16 Nov-17 Nov-18 Nov-19 Nov-20 19
2) The ESG is a secular trend that is rapidly spreading. 3) New
0.0% US Investment Grade EU Investment Grade strong growth in share price. We expect this trend to continue in
Macro opinion by technologies
Jul-14 Nov-14
such
Nov-15
as Alibaba
Nov-16
or Ant disrupt
Nov-17 Nov-18
fundamentally
Nov-19 Nov-20 Nordea Responsible 2021.
17
It is even more pronounced in the US, where Tesla’s share
Sebastien Galy, PhD, established companies. 4) Infrastructure is likely to benefit from
US Investment Grade EU Investment Grade
Investments Team price increased sevenfold and sustainability-themed business
15
Nordea’s senior macro strategist government spending in Europe and the United States. This is
100% 0.9% Nordea Stars Funds
models as a whole have become an increasingly important
a defensive asset class, trading at historical discounts with high source
13 of both disruption and economic growth. Plant-based
Outlook 2021* exposure to secular trends like ageing assets, de-carbonization
12.0%
• ESG will become the most powerful driver of burger producer Beyond Meat’s stock has also CSI 300
doubled since
100% 0.9%
80%
and data growth, which will further drive growth potential 32.4%of
12.0%
outperformance for certain sectors its listing in late 2019, despite a turbulent ride. In the retail
11
2021 should see the global economy led by China and a moderate this
80%
asset class. • A progressive Biden administration could enable a sector, the imminent IPO of second-hand retailer Poshmark is
60% 9
recovery in Europe and the United States in an environment 32.4%
54.8% boom of ESG investing in the USA generating outstanding interest. We expect business models
EM MSCI (16.8) CSI 300 (19)
supportive of risk, though already with some pockets of very Conclusion such as Poshmark to increasingly threaten traditional fast
60%
40% • We expect increased regulation and client scrutiny as 7
tight pricing in investment grade. We are focused on 1) A China- The environment next year should be broadly supportive for
54.8% fashion outlets, and we would also expect many of Poshmark’s
well as an increased focus on social issues
led rebound 2) ESG solutions supported by policies in Europe risk,
40%
yet there are already signs of excessively tight pricing in competitors on the European side (eg. Depop) to be listed on
20%
and the United States 3) New technologies 4) Infrastructure, investment grade. We expect to see bouts of volatility from this, stock
30% exchanges in the near term.
and 5) Flexible solutions that can quickly adapt the geometry as20%
well as periods of lower growth expectations. This continues ESG will become the most powerful driver of outperformance YTD range YTD Total Return Q1 Total Return Q2 Total Return Q3 Total Return
0% 20%
of a portfolio. to suggest
Nov-04
holdingNov-08
flexible solutions
Nov-12
that Nov-16
can quickly Nov-20
adapt to for certain sectors. We do see a trend towards regulators, clients, In Europe the big challenge will be responding to regulation
new0%
circumstances.
BA B CAA CA and lower and media increasing their scrutiny on ESG considerations. We and
10%
moving product design in line with its aims. Increased
A China centric rebound Nov-04 Nov-08 Nov-12 Nov-16 Nov-20 furthermore expect an increased focus on social issues, in the client scrutiny of ESG offerings is already a reality. As a swath of
China is the bright spot as the economy steadily rebounds and BA B CAA CA and lower context of climate change and in a broad sense as well. But European
0 sustainability regulation comes into force in 2021, both
continues at a very decent clip. Consumption should also steadily EM forward PE trades at a large discount mainly, as ESG established itself in 2020 as mainstream, we companies and investors will have to work on transparency.
30 -10%
improve as the job market tightens with growth expectations of believe 2021 will be the year where ESG will establish itself Here, it will be about proving that ESG investing has actual
8% for 2021. China’s demand is already supporting production 30
almost as a blockbuster. impact,
-20%
not just a good marketing story.
25
in Germany and this should help the rest of Asia Pacific. Note
though that China is on a course for some import substitution in 25
There were many indications for this direction of travel in 2020 Lastly,
-30% we expect that climate change will hold as both a
20
critical industries at a time when regional frictions are increasing. already, both on the investment side and for the valuations of regulatory
EUR HY and investment
US HY EUR HY
Xover
trend.
US HY
CDX
There
EUR AT1 were
US AT1 fears COVID-19
EUR LL US LL
While this is an important development over a five year horizon, 20
stocks with a strong sustainable story. On the investment side, would deprioritize this megatrend but our society acknowledged
15
we remain focused on the economic rebound. ESG themed funds emerged as clear winners of the COVID-19 this
10% became time sensitive. We do believe the social aspect of
15
pandemic as inflows were indisputably strong, and there climate change adaptation and mitigation will be in focus, as
10
USA – W shaped recovery were robust indications for outperformance of ESG products. with
8% many other areas, the pandemic shone a light on social
Faced with a possibly W-shaped recovery, the Democrats may 10
5
Most institutional investors expect to increase allocations to issues. We expect social justice in a broad sense to play a more
have to wait for the January 20th Presidential inauguration to ESG products (82% according to a recent survey conducted significant
6%
part in our engagement work in 2021 as a result of
pass a substantial fiscal package, and this with difficulty if the 5
0
by Amundi), coupled with very supportive political trends in that.
4%
Republicans hold the Senate. For now, we haggle on a budget May-05 Sep-07 May-10 Sep-12 May-15 Sep-17 May-20 key markets such as China and the USA following Joe Biden’s
of circa 900 billion dollars. Beyond this and partially to finance 0 MSCI EM MSCI US MSCI EU victory. In short, ESG has proven to be not just a luxury for a bull To sum up, we expect ESG to become a key outperformance and
2%
it, taxes are likely to rise somewhat for those earning two May-05 Sep-07
Source: Bloomberg as of 10.12.2020
May-10 Sep-12 May-15 Sep-17 May-20 market, but a necessity for turbulent times. valuation driver and we should see new listings with a strong
hundred thousand and above, while capital gains could increase MSCI EM MSCI US MSCI EU sustainability story to outperform significantly. We also expect
0%
somewhat to be a tad more in line with personal income so as 1.2 80 A progressive Biden administration could enable a boom of increased regulation and client scrutiny, as well as an increased
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021E
not to discourage labor. This should help finance a broader EM outperforms when the dollar is weak ESG investing in the USA, where the field has been growing focus on social issues.US HY Default Rate European HY Default Rate
health insurance, infrastructure, student loan forgiveness and a 1.2
1.0 80 in popularity but also been much more controversial than in
90
USD 1.7 trillion plan – in theory - to reach zero net gas emissions Europe. We expect a much more benevolent regulatory climate Share price development of Beyond Meat
by 2050. 1.0
0.8
90
under a Democratic government. Furthermore, the Democrats and
300 Tyson Food during 2020
100 seem to have won a tight majority in the Senate in addition to
Europe – dispersion in growth 0.8
0.6 the White House and the House of Representatives. This should 250
100
Growth in Europe is decelerating with lockdowns in several 110 increase the chances of a US Green Deal to materialise – at this
countries and should start to rebound in January and February. 0.6
0.4 stage it is difficult to assess how much of a game changer this 200
Consensus expects economies to broadly recover together, but 110 will be.
120
the odds are of some dispersion with the North outperforming. 0.4
0.2 150
For example, Nordic economies are expected to grow at 3.5%. 120
The EU Green Deal has already provided incentives for new
0.2
Nonetheless, Europe is likely to grow at a decent pace as its 0.0 130 listings of sustainability themed stocks, and for the valuations 100
´97 ´98 ´99 ´00 ´01 ´02 ´03 ´04 ´05 ´06 ´07 ´08 ´09 ´10 ´11 ´12 ´13 ´14 ´15 ´16 ´17 ´18 ´19 ´20
economies are far below potential. of companies with a strong green story. For example, Electric
0.0 MSCI UM/US (lhs) Broad Nominal Dollar (reverse rhs) 130 0
Vehicule charging supplier Compleo’s share price has doubled
´97 ´98 ´99 ´00 ´01 ´02 ´03 ´04 ´05 ´06 ´07 ´08 ´09 ´10 ´11 ´12 ´13 ´14 ´15 ´16 ´17 ´18 ´19 ´20 Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20
Product implications 21 MSCI UM/US (lhs) Broad Nominal Dollar (reverse rhs)
in the few months since its listing. New technologies, such as
BEYOND MEAT (USD) TYSON FOODS (USD)
There are a series of product implications: 1) A China rebound Source: Bloomberg as of 10.12.2020
enzymes that can be used in plastic recycling, and hydrogen
Source: Refinitiv, Thomson Eikon
can be expressed through EM exposures or specific China ones. 19
21 electrolysers are establishing themselves rapidly and delivering
17
19
*Information as of mid-December 2020 Source: Nordea Investment Management AB. Date: December 2020. Unless otherwise stated all views expressed are proprietary to Nordea Investment Management AB
15
17
2 3
13
15
CSI 300200 bps
4%
0 bps
2% -200 bps
4
98
0
2
6
8
0
2
4
6
6
8
0
-0
-1
-0
-1
-0
-0
-1
-0
-1
-2
-0
-1
c-
ov
ov
ov
ov
ov
ov
ov
ov
ov
ov
ov
ov
De
N
N
N
N
N
N
N
N
N
N
N
N
Spread between
Implied Cap Rate and Moody's BAA Yield Implied Cap Rate Moody's BAA Yield
Asset Allocation
30
USD 25.78tn
USD, trillion
25
risk appetite in addition to a possibly depreciating US-Dollar
The RI team is engaging with 30 companies to align with the TCFD recommendations Nordea Multi Assets Team would
20
be in favour of EM we see corporate governance rather
USD 23.03tn
Nordea 1 - Stable Return Fund weak
15
compared to DM. Furthermore, possible earnings growth
in Emerging Markets is very much centred within the growth
Nordea 1 - Flexible Fixed Income Fund
segment
10 of the market and also largely depending on the news
Nordea 1 - Alpha 10 MA Fund
flow.
5
• The economic outlook is good, with Covid-19 vaccines
hopefully paving the way for return to normal life styles From
0 a style perspective, we clearly favour the more defensive/
Nordics: 5 companies and still heavy economic and financial support from low1980
risk equity
1985 segments.
1990 1905 The 200positive
2005 news
2010 flow
2015 around
2020 vaccine
2025
Canada: 1 company both fiscal and monetary policy development has triggered a rotation away from the expensive
United States GDP China GDP
• Equities are currently fair valued on 12-month forward growth sector - which has been favoured by investors for so long
France: 1 company Germany: 4 companies
earnings. The valuation using next years estimated - and has instead channelled renewed investor interest into the
earnings is less challenging and together with support value and quality related market segments. This style rotation
US: 13 companies Portugal: 1 company Korea: 2 companies
Japan: 1 company from earnings and leading macro momentum as well is30further supported by very attractive valuation levels of value
USD 25.78tn
as the current low yield environment there is still some compared to growth, both on an absolute and relative basis.
USD, trillion
25
Switzerland:
2 companies room for higher equity prices. One source of caution for With everything currently priced for low/moderate inflation and
Taiwan: 1 company
us is credit with its tight valuation, high leverage and earnings
20 growth still facing some uncertainties, we have a high
Mexico: 1 company USD 23.03tn
likely rising default risk conviction in our Stable/Low Risk Equities. Their historically high
15
valuation gap paired with a more resilient and stable earnings
Dec 2019 status Full TCFD support
outlook
10 gives room for future return potential and makes them
New additions
1
5 The year 2021 will likely see a recovery from the extraordinary a very attractive investment case in our view.
5
Active
No circumstances the COVID-19 pandemic has created. However,
3 response
dialogues
15
the shape and pace of the economic recovery will also largely 0
and partial
Chile: 1 company support
depend on an economy’s ability to contain the spread of the Historical
1980 1985 vs.
1990 expected
1905 200 returns
2005 2010 across
2015 2020 2025
9 virus as well as to organize the distribution of vaccines that are different asset classes
United States GDP China GDP
going to be approved by local health authorities in the near
Pending further 12%
action future. This should nevertheless only have a limited impact 11.2%
on sovereign yield curves as the extreme low/negative yield 10%
environment is likely to persist for longer given the extreme 8%
fiscal and monetary support measures which have been put in 6.1%
5.8% 5.8%
6% 5.6%
place by governments and central banks across the globe in 5.2%
order to deal with the economic consequences of the pandemic. 4%
3.2%
3.7% 3.7%
3.2%
2.6% 2.8%
2% 1.8%
1.5%
Region wise we have seen that East Asian economies such 0.4%
0
as China, Japan and South Korea have managed the virus -0.7%
-0.3% -0.3%
quite well, whereas the developed economies as well as most -2%
emerging markets have struggled to do so. While China´s Gov. Bonds Gov. Bonds
EU US
IG Bonds
EU
IG Bonds
US
HY Bonds
US
HY Bonds
US
EM
Bonds
Global
Stocks
EM
Stocks
economic recovery is already well underway we would expect Past 10Y returns Next 10 Y expected returns
other economies to follow closely during 2021 in a scenario with Source: Nordea Investment Management AB, on the basis of analyses carried out by the Multi Assets Team.
Period under consideration: 31.10.2010 – 31.10.2020. Past and expected returns are unhedged, in base curren-
accelerated vaccine approval and distribution. cy and from EUR based investor’s stance. The performance represented is historical; past performance
is not a reliable indicator of future results and investors may not recover the full amount invested. The
15%
value of your investment can go up and down, and you could lose some or all of your invested money.
Expected numbers are only targets. There can be no warranty that anLong termobjective,
investment Compound targeted
Volatility wise there is however room for surprises and we see returns and results of an investment structure is achieved.
Annual Growth Rate (CAGR): 7%
several factors that could have a strong impact on the recovery 10%
story in 2021, such as Covid-19 infection rate development,
subsequent lockdowns or lockdown easings as well as continued All in all, equities should do relatively well and we see a much
5%
monetary and fiscal stimulus. brighter outlook compared to fixed income and credit. The risk
appetite is still good, the global earnings cycle is on a path to
All of the aforementioned can potentially have a large effect on recovery
0
and risky assets are well supported by ample fiscal and
consumer and business confidence in 2021 and impact size and monetary support. We currently see quite a strong correlation
shape of the economic recovery process. between
-5% risky assets which indicates that the market is
momentum
2009 2010 driven
2011 2012 and
2013 as2014long
2015 as
2016the
2017general
2018 2019risk
2020fappetite
2020f 2021f stays
(ex-airports)
2022f
From a geographical perspective, we slightly favour Developed at decent levels our positive view should find ample support.
Cutline 1 Cutline 2
Markets (DM) over Emerging Markets (EM). While an improving Earnings have taken a severe hit in 2020 due to Corona but
3.5%
3.0% No
Source: Nordea Investment Management AB. Date: December 2020. Unless otherwise stated all views expressed are proprietary to Nordea Investment Management AB.
2.5%
4 2.0%
5Nordic Equities
the reopening of global economies support a steady economic From a longer-term standpoint, it is key to highlight that expected Global equity markets have become used to monetary and
improvement in 2021 and beyond, and we should likely see a returns for the next decade will be significantly different from Nordea Nordic Equities/ physical stimuli, which have again extended the time of low
cyclical rebound as well as a continued rotation from growth to what investors have seen over the course of the previous one, Swedish and Finnish interest rates. In 2020, physical stimuli came with a green label
value that has recently gained in popularity with the extreme with shrinking expectations taking a toll across traditional asset Equity Team and thus seem to have twofold intentions: bridge the recession
valuation gap starting to close. Nevertheless, we also expect this classes. This is especially true for fixed income, with low to even and accelerate environmental investments. In the EU, the Green
to come with higher bouts of volatility given the still prevalent negative expected returns across the asset class, except for the Nordea 1 - Nordic Equity Fund Deal combined with EU taxonomy, will undoubtedly continue
uncertainties in the market. high yield segment which in turn bears significantly higher risk Nordea 1 - Nordic Stars Equity Fund to support climate positive companies, which have started to
100%
for investors. By contrast, equities will still be very much in the • Strong sentiment going into 2021 is supporting high represent a significant part of the Nordic investment universe.
The Fed still plays an important role, and continuous fiscal and spotlight as the main source of returns for the coming years. 80% valuations Meanwhile conventional energy, that used to dominate the Oslo
monetary stimulus will remain one of the main drivers of overall Here the question is whether they will be able to deliver those stock exchange has become an marginal part of the MSCI Nordic
• The Nordic countries will hold up well after the
equity markets performance and sentiment in 2021, especially expected returns without any significant increase in volatility or Index. We expect the strong ESG theme to continue in 2021
60%
pandemic
during H1. We do see the potential for continued supportive any sizeable correction. and believe it will remain a significant valuation driver. We will
measures, a scenario which would back a faster economic • We expect the Nordic equity market to continue to continue to strengthen our ESG research capabilities, deepen
40%
recovery. With fixed income’s diversification potential being significantly outperform Europe ESG integration in our investment process and philosophy and
decreased at the current interest rate levels there is a strong 20% improve the ESG product offering.
Within the fixed income space we retain our cautious stance need for investors to have other, alternative tools available to
given the extremely low/negative yield environment. Contrary be able to diversify equity beta risk within their portfolios. This The
10% stock market has recovered surprisingly well from the The Nordic MSCI Index outperformed MSCI Europe Index
to credit and equity markets, bond yields have not shown remains more pressing than ever, particularly as the traditional exceptional circumstances occurred in 2020. Government stimuli substantially in 2020. This is no coincidence, but the same
many signs of recovery. Instead, bond yields continue to be diversification potential that investors have been used to in have
0 worked to bridge the uncertainty around the pandemic trend we have seen during the 21st century. When looking at
held down by very accommodative central bank policies and the past has shrunk even more significantly in 2020. The sharp and we 1980 are1985going1990into199520212000
at high 2005 valuations
2010 2015 but
2020positive
2025 total return of Nordic MSCI versus European MSCI indices, the
forward guidance (promises to keep interest rates ultra-low). equity market sell-offs investors had to experience in March and sentiment. The recovery is however uneven, as the global
INDEX A INDEX B INDEX C INDEX D INDEX E Nordic shows consistent outperformance over both a three
US duration remains relatively more attractive, given interest September 2020 have been a strong testimony of this dilemma manufacturing industry keeps recovering while the global and five year perspective. It is difficult to explain the consistent
rates are still higher compared to Europe where interest rates investors are facing (e.g. duration vs. equity beta). We therefore service industry gets deeper into the recession with continued outperformance since it appears across industries, other than
remain bleak and – in our view – are expected to remain low want to stress the importance of having proprietary alternative restrictions
22
and as stimulus packages are wearing of. The trend with qualitative factors. The Nordic universe offers well-run
for a longer time. Moreover, we also expect US rates to be defensive strategies in the toolbox that can help investors to fight in20the Nordic countries looks similar to continental Europe, but companies, with quality business models and strong corporate
more dynamic compared to Europe which adds to the relative that dilemma and achieve diversification within their portfolios. low government debt levels and high tax rates have allowed for governance. A large part of the Nordic universe is exposed to
attractiveness. Nevertheless, we see duration premia being One example is the use of defensive currencies being selected powerful
18
local stimulus packages. This is probably best reflected the global economy given the company’s history of expanding
at rather unattractive levels and the diversification benefits based on quality characteristics and attractive valuation that can in16 the outperformance of Nordic financial sectors compared internationally offering diversified end-markets with both global
investors could previously harvest are continuously fading. serve to achieve the desired diversification effect. to European financials as this is a local industry. Sweden, the and local strong holds. The are some country variations with
14
When interest rates go up we can see duration becoming largest Nordic country that represents roughly 45% of the 13.2
MSCI
13.8 Denmark being more exposed to the Healthcare sector, Norway
more attractive again but for the time being we do not see this So, now more than ever, investors must focus on diversification Nordic
12 Index, has been widely criticised for its liberal strategy 11.7
to commodities and Sweden and Finland to Industrials and
happen in the near future. Instead, bond yields should remain and find investment solutions that can rebalance and enhance to control the pandemic and is being less affected, which 11.7 has Financials. This allows for diversified industry exposure for the
10
well-anchored by asset purchase programs and low inflation risk adjusted portfolio returns (since most of the traditional become visible in the strengthening of the Swedish krona. 11.7 region as a whole.
expectations. diversification potential has faded away). While we have been We8 should get more clarity about the permanent effects from
claiming that diversification has been at risk for some years the pandemic in the second half of 2021, as we see what new In general, we are cautiously optimistic regarding duration of
6
As for credit, we have recently witnessed a massive spread now across traditional asset classes, 2020 has proven us right; consumer habits and patterns look like without government currently elevated equity valuations considering that interest
2010 2011 2012 2013 2014 2015 2016 2107 2018 2019 2020 2021
compression despite largely credit-unfriendly trends in the our proprietary strategies helped us to navigate extremely restrictions. rates should remain low. The volatility in the equity markets has
Ibov P/E F12M Average + 1 Std DV – 1 Std DV P/E 2020 P/E 2021
marketplace. Nevertheless, corporate bond markets have rough seas by offering an attractive asymmetric behaviour allowed us to continue to find new investment ideas that fit our
continued to push spreads lower with support from the central and attractive risk-adjusted returns while still maintaining a Historical performance of Nordic vs. strategy to invest in above average companies at below average
banks’ bond purchases as well as generous liquidity. However, highly liquid portfolio profile. Especially the latter is also very European equities prices and we expect this to continue in 2021.
given the significant drawback global lockdowns had on important as we have witnessed during the 2020 March sell- 30
economies worldwide and the full impact of these measures off that certain market segments have dried up significantly 25
likely to further materialize in 2021, we expect increasing default in terms of liquidity which was a strong reminder for investors 20
rates in the future which is also indicated by leading default that liquidity is a key factor that should not be underestimated.
15
indicators. We still find that corporate debt compared to profits This is why liquid alternatives provide interesting investment
10
are rising and current spreads – now close to pre-covid-19 levels opportunities. If wisely chosen, they can offer low correlation to
5
– do not offer much insolation from possible defaults or rating traditional asset classes by exploiting alternative and diversified
0
downgrades. Hence, this leads us to remain a cautious stance sources of returns.
-5
on credit and we believe that more attractive risk/return profiles
-10
can be found within equity markets.
-15
D
7
19
5
6
8
9
10
11
12
13
14
15
16
17
18
0
YT
0
0
0
0
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
MSCI Nordic Index MSCI Europe Index
Source: Nordea Investment Management AB. Date: 15.12.2020
12 % 1.400 bps
6 The current U.S. REIT implied cap rate 7
spread to investment grade corporate 1.200 bps
bonds is over 100 bps above the
10 %
long-term average spread.European Equities North American Equities
In a pessimistic scenario, we could see serious side-effects
Nordea European Equities/ leading to few people taking a vaccine, the vaccine could fail River Road Asset Management Forward 1 Year Price to Earnings ratio
Fundamental Equities Team to help against asymptomatic cases and thereby prolong lock-
downs or a mutation of the virus could lead to the pandemic Nordea 1 - North American Value Fund/
Nordea 1 - European Stars Equity Fund
14% 120
continuing well into 2022. We believe that the market today is Nordea 1 - North American Small Cap Fund Russell 2000 15.83 19.52 26.18
Nordea 1 - European Small & Mid Cap Equity Fund
12%
110 pricing in a lot of “return to normal” and a negative scenario • The US economy recovery should continue with
10%
• In an optimistic scenario, we could have a fast roll-out could therefore lead to materially lower equity levels during 2021. momentum increasing during H2 2021. We believe GDP
8%
100
6%
of the new COVID-19 vaccines during Q1 and Q2 which We do however believe that the overall market will temporarily growth will be in the 4.5% range in 2021, driven by a Russell 1000 19.21 24.51 32.66
4% could lead to an end of the pandemic sometime in the 90
be willing to look through a spike in virus cases, lock-downs resurgence in consumer spending and industrial capex
2% summer in most countries. and weak quarterly financial results well into the beginning of
• For stocks, 2021 will be a battle of higher earnings
0• 2021 could see the strongest economic upturn in 20
80
2021, as long as we are heading towards a normalisation (the
versus lower valuations as the economy reopens. S&P 500 23.88
-2%
years with the large European Green Deal supporting positive scenario).
70 Absolute valuations for the broader market are
-4%
both the economy and the green transition. extremely high, but we believe earnings growth is likely
S&P 500 Value Core Growth
-6% 60 We have a balanced positioning in our European STARS strategy,
• 2000
The political
2002 2004 support
2006 for2010
2008 the green
2012 transition
2014 2016 supports
2018 2020 2022 to be very strong with the consensus forecasting the
as we see the highest likelihood for the positive scenario, but
our strong focus
ECB M1on ESG
money and the
supply pandemic
EU Eco sentiment has not strongest two-year recovery in earnings since World Chart shown as of November 30, 2020. Excludes negative earnings. Index data source: London Stock
cannot rule out the pessimistic one. Exchange Group PLC and its group undertakings (collectively, the “LSE Group”), © LSE Group; Standard
caused any slow-down in green ambitions across the War II & Poor’s.
globe. We have a large exposure towards companies • Many areas of the stock market are more favorably
In 2020 we have seen unprecedented support from central
benefitting from the transition towards a green priced than broader averages like the S&P 500, most
banks that will continue into 2021 and that could lead to a
economy and believe this megatrend will support our notably smaller cap and value stocks. We believe the this should increase demand for low-income jobs, supporting
very positive economic outlook in the absence of a negative
investments well into 2021 and beyond rotation favoring small caps and value stocks will re- spending across all income levels.
virus scenario. By looking at the strong historical relationship
between money supply and economic activity, we could have emerge in early 2021 and continue through at least the
Regarding industrial capex, spending on consumer goods may
2020 has been a volatile year in the equity markets and we did the strongest economic upturn in 20 years by the end of 2021. first half of the year, supported by attractive relative
level off in 2021 as spending on services increases. However,
see both the fastest bear market and the fastest recovery ever We have further seen a change in fiscal policy, for example the valuations and historical patterns in the early stage of
the restocking cycle should continue through much of 2021 as
recorded. Looking into 2021, the COVID-19 situation and the roll- large Green Deal in Europe that will support both the economy economic and profit cycles
inventories are extremely low. This should boost industrial pro-
out of vaccines make the outlook even more complicated than and the green transition. We believe that the political support for duction, capacity utilization, and (ultimately) industrial capex.
normal. In an optimistic scenario, we could have a fast roll-out the green transition supports our strong focus on ESG and that From an inflation perspective, the shock from COVID-19 did not
of the new COVID-19 vaccines during Q1 and Q2 which could the pandemic has not caused any slow-down in green ambitions We expect the U.S. economic recovery that began in mid-2020
result in a typical recession as demand for goods surged, while
lead to an end of the pandemic sometime in the summer in most across the globe. We have a large exposure towards companies to continue throughout 2021, with momentum increasing dur-
producers struggled to keep up. This created a floor under price
countries. In addition, other long-term market overhangs like benefitting from the transition towards a green economy (and ing the second half of the year as the nation fully reopens. This
inflation. In 2021, these demand and supply forces should nor-
Brexit and the US-China trade war could be resolved, the latter no exposure to oil and gas companies) and believe that this is based upon our assumption that stimulus funds will enter the
malize. The biggest risks to our economic forecast are a mean-
helped by Biden’s Presidency. Favourable outcomes could lead megatrend will support our investments well into 2021 and economy by February and vaccines will be both widely avail-
ingful delay in the distribution of vaccines or a mutation of the
to a positive year for equities in 2021. beyond. able and administered by the end of Q2. It further assumes
virus that keeps lockdown measures in place. While we think
the Federal Reserve will remain highly accommodative, which
risk of the latter causing widespread disruptions is a relatively
Putting it all together, we could have not just a V-shaped is supported by recent statements made by the central bank’s
low probability, it could potentially have devastating conse-
Federal Open Market Committee (FOMC). At the conclusion
Development of ECB M1 Money Supply and recovery but a V+-shaped recovery of the economy, and we are quences for U.S. and global economic growth.
of its December meeting, the FOMC delivered new economic
European Economic sentiment thus optimistic about the equity markets for 2021. The market
has somehow already positioned itself for a strong recovery projections that showed a more optimistic outlook, while con- On the political front, we see limited risk with the transition to
14% 120
and cyclical stocks trade on high multiples, while more counter- tinuing to underscore how patient the committee plans to be in President-elect Joseph R. Biden Jr. in January. President-elect
14%
12% 120
cyclical sectors like Health Care and Consumer Staples trade on firming policy. Biden’s ability to implement the most divisive aspects of his
110
12%
10%
110 more than two standard deviations’ discount vs. the last 10 years. campaign platform, including higher taxes and greater regula-
10%
8% Consequently, we believe GDP growth will be in the 4.0% to
100
We believe that it makes sense to have a barbell approach going tion, will be held in check by Republican control of the Senate
8%
6% 5.0% range in 2021, driven by a resurgence in consumer spend-
100
into 2021 and we are hence overweight Banks, which have been and the Democrat’s tenuous post-election control in the House
6%
4% 90 ing and industrial capex. Regarding the consumer, post-vaccine
lagging the cyclical recovery, and overweight Health Care which of Representatives. Although the runoff elections in Georgia
4%
2% 90
growth should be fueled by a combination of low- and high-in-
80 looks very attractive from a historical valuation perspective. during January could still shift control in the Senate, we think
2%
0
come households. Low-income consumers should benefit from
0
-2%
80 this is a low probability. Furthermore, investors would be well
70 a second round of stimulus checks and improved employment
-2%
-4% served to note that the profit cycle is a much bigger driver of
70 trends, while higher income households will likely unleash
-4%
-6% 60 stocks and the economy than politics.
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
60
pent-up demand fueled by excess savings. According to Jef-
-6%
2000 2002 2004 ECB
2006 2008supply
M1 money 2010 2012EU Eco
2014sentiment
2016 2018 2020 2022 feries, the top 25% of U.S. households have suffered virtually For stocks, 2021 will be a battle of higher earnings versus lower
ECB M1 money supply EU Eco sentiment no job losses yet their spending is down nearly 10%, which valuations as the economy reopens. Absolute valuations for the
Source: Bloomberg as of end November 2020.
has driven a surge in the savings rate. As these households broader market are extremely high, with the S&P 500 currently
increase their spending on travel, food services, and recreation, trading in the 96th percentile, based upon historical forward
Source: River Road Asset Management. Date: December 2020. Unless otherwise stated all views expressed are proprietary to River Road Asset Management.
8 920
15
10
5
0
-5
Emerging Market Equities -10
-15
D
07
19
05
06
08
09
10
11
12
13
14
15
16
17
18
YT
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
MSCI Nordic Index MSCI Europe Index
P/Es. However, we believe earnings growth is likely to be very
many DM nations, as well as in EM regions like Latin America
strong as the economy begins to normalize, with the consensus GW&K and
12 % EMEA. They also necessitated less aggressive use of fiscal
1.400 bps
forecasting the strongest two-year recovery in earnings since
Investment Management The current U.S. REIT implied cap rate
stimulus during the global recession, whichgrade
spread to investment will leave1.200
corporate those
bps
World War II. Additionally, we think stocks look very favorable bonds is over 100 bps above the
nations
10 % with less fiscal drag in coming years
averageas the 1.000
world
compared to bonds. The S&P 500 dividend yield is nearly 2x the Nordea 1 - Emerging Wealth Equity Fund long-term spread. bps
economy recovers.
yield on 10-year Treasuries (1.58% versus 0.84% as of Novem- Nordea 1 - Global Small Cap Fund 8%
800 bps
ber 30) and dividends are likely to rise next year. Furthermore,
• Emerging economies have experienced considerably The Asian growth advantage also reflects the role of technology 600 bps
unlike bond yields, earnings are nominal and tend to participate 6%
shallower economic declines than developed countries and goods-producing industries in driving growth in 400those bps
in inflationary upside.
wile recoveries look more robust nations, since those industries have demonstrated relative 200 bps
4%
Finally, many areas of the stock market are more favorably • While EM growth in the last years was clearly Asian resilience during the pandemic, and, more importantly, healthy 0 bps
priced than broader averages like the S&P 500, most notably led, a broad based global recovery, accompanied by a consumer spending in China. The country is the world’s fastest
2% -200 bps
smaller cap and value stocks. Our small cap team was spot-on weaker US dollar and higher commodity prices could growing consumer and the size of its economy is quickly
4
98
0
2
6
8
0
2
4
6
6
8
0
-0
-1
-0
-1
-0
-0
-1
-0
-1
-0
-1
-2
approaching the US. However, it also reflects Asia’s business
c-
ov
ov
ov
ov
ov
ov
ov
ov
ov
ov
ov
ov
with their proclamation in mid-July that a more sustained rota- help economies in Latin America and the EMEA region
De
N
N
N
N
N
N
N
N
N
N
N
N
tion favoring small caps and value stocks had commenced. This dynamism, embrace of economic reform, focus on education,
Spread between
• Relative valuation of emerging markets remains Implied Cap Rate and Moody's BAA Yield Implied Cap Rate Moody's BAA Yield
trend, which began on July 10, continued through November, and execution proficiency.
reasonably attractive
pausing only in December as COVID-19 surged. We believe this
rotation will re-emerge in early 2021 and continue through at China GDP quickly approaching the US
least the first half of the year, supported by attractive relative
valuations and historical patterns in the early stage of economic A very bright light at the end of the pandemic tunnel appeared 30
USD 25.78tn
and profit cycles. However, it is less clear to us whether a mul- late in 2020, with news that highly effective vaccines will soon
USD, trillion
25
ti-year trend can emerge as many of the secular elements favor- be available. It appears that we are now past the depths of this
ing small cap and cyclicals are not yet apparent. crisis and will hopefully soon return to a routine business cycle. 20
There are obviously unknowns that could influence emerging USD 23.03tn
15
In summary, we expect a robust recovery for the U.S. economy market equities in the short-term or longer, such as elevated
in 2021. Unfortunately, this is already reflected in the valuation debt levels on a global basis, the pace and sustainability of 10
of the S&P 500. Additionally, we expect risks will increase in the immunizations, and whether pandemic containment policies
second half of the year as stimulus wears off and the restocking create long lasting behavioral changes. Nevertheless, we believe 5
cycle fades. At that point, valuations will become more impor- continued global economic expansion is the most likely scenario 0
tant to investors. Fortunately, we believe smaller cap and value for the next several years. 1980 1985 1990 1905 200 2005 2010 2015 2020 2025
stocks still present compelling relative investment opportuni- United States GDP China GDP
ties. Thus, while we are neutral on the broader market in 2021, The pandemic induced economic contraction was generally Source: Duff & Phelps, Bloomberg Finance L.P., Citi Research.
expecting modestly negative or positive returns for the S&P not as severe as initially feared – particularly in emerging
500, we expect greater upside for the relatively attractive small Asia. The latest OECD Economic Outlook upgraded its forecast This is a structural phenomenon that is unlikely to change and
cap and value segments. for 2020 global economic growth from -8.0% to -4.4%, with will
30 be a key driver of global economic expansion for many
China expected to grow nearly 2%. The prevailing narrative years. China and India are both home to nearlyUSD 25.78tn people
1.4 billion
USD, trillion
25
for 2021 is robust economic growth, backed by the expedient each – they are the world’s largest consumer bases and both
normalization of business activity and still loose US monetary are
20 growing more than the global average. The countries of
policy. For example, J.P. Morgan sees global GDP expanding China, Taiwan, South Korea, and India are USD also23.03tn
exceedingly
15
by about 5% in 2021 after a decline of 4% in 2020. That 2021 important to emerging market equity performance, since they
gain would represent the strongest yearly gain in over two comprise
10
approximately 70% of the MSCI Emerging Markets
decades. Importantly, emerging market nations are expected Index. We have long recognized Asia’s growing influence on
to lead with a gain of 6.8% in 2021 following a decline of 2.0% emerging
5 markets, especially China’s strength and the immense
in 2020. In contrast, developed countries are projected to consumption opportunity in both China and India. This will
0
grow by 3.8% in 2021 following a decline of 5.2% in 2020. If continue
1980
to
1985
be a1990critical
1905
area 200
of investment
2005 2010
focus
2015
for
2020
us 2025
in the
forecasts like this are on track, emerging economies will have near future. United States GDP China GDP
experienced considerably shallower economic declines than
developed countries in 2020, while generating recoveries that The
12% situation is quite different in other EM regions.
11.2% In the
are substantially more robust in 2021. immediate
10% future, a broad-based global recovery, accompanied
by a weaker U.S. dollar and higher commodity prices, could
8%
The overall EM growth advantage in this unusual global cycle help growth-sensitive, commodity-oriented economies in Latin
6.1%
reflects the highly effective public health measures seen in key America
6% and the EMEA region5.8% play catch up 5.2% in 2021. Longer-
5.6% 5.8%
Asian EM economies like China, South Korea, and Taiwan. Those term,
4% a concerted economic
3.7% 3.7% reform agenda is needed for certain
3.2% 3.2%
measures helped secure shallower and shorter downturns than countries
2.6%
in these regions, like Brazil and 1.8%
South Africa, to2.8%reach
2% 1.5%
0.4%
0
Investment-0.3%
Source: GW&K Investment Management. Date: December 2020. Unless otherwise stated all views expressed are proprietary to GW&K-0.7% -0.3%
Management.
-2%
10 Gov. Bonds Gov. Bonds
EU US
IG Bonds
EU
IG Bonds
US
HY Bonds
US
HY Bonds
US
EM
Bonds
Global
Stocks
EM
Stocks 11
Past 10Y returns Next 10 Y expected returnsAsian Equities
full economic potential. There are optimistic signs: Brazil, for to be gradual and uneven. The economic stress felt in 2020
example, passed a long overdue overhaul of the public pension Manulife Investment may have to work its way through 2021 and we expect to see
system and plans to address its onerous tax system. We are Management deterioration of loan asset quality along the way, particularly in
closely watching these regions, hopeful that they will follow a sectors with prolonged earnings weakness. Given the dispersion
Nordea 1 - Asia ex-Japan Equity Fund of consensus estimates for GDP growth across the Asia region
pro-growth path.
Nordea 1 - Chinese Equity Fund (Chart 1), it is imperative that we focus on the key structural
Finally, the 2021 backdrop appears supportive for emerging • Consensus estimates a strong GDP growth for Asia ex- trends that would gather interests in 2021, instead of applying a
market equities. With major central banks likely to keep Japan economies, China and India broad-brush optimism over a swift recovery.
monetary policy highly accommodative for the next several • Key structural trends ahead: broad base adoption
years, the path of least resistance for global equity markets still of 5G technology, Climate change and sustainable Key structural trends in 2021:
appears to be up. In addition, the relative valuation of emerging development, factory automation and digitalisation of
markets remains reasonably attractive. At the end of November, economy in South East Asia 1. Broad base adoption of 5G technology
for example, the Shiller PE ratios of the S&P 500, MSCI EAFE, and This is expected to trigger a replacement cycle globally and we
MSCI EM Indexes stood at 29.3, 18.8 and 14.8 times respectively. believe the supply chain in Asia, particularly the tech supply
With 2021 consensus earnings growth for the MSCI EM Index We started the year in 2020 with a host of uncertainties. There chain in North Asia (Taiwan, China, Korea) will benefit from this
currently averaging 32%, emerging market equities should build was expectation that the tension between US and China will trend.
on 2020’s commendable performance. escalate ahead of the US Presidential Election. The concern was 2. Climate change and sustainable development
quickly overshadowed by the outbreak of Covid-19, which led to The commitment to reduce green-house gas emission is
shutdowns and lock down of activities across the globe sending expected to expedite the development and adoption of electric
prices of various asset classes on a downward spiral. In light vehicles and energy efficient products which expected to induce
of the sudden shock to the global economy, governments and growth in the ecosystem of renewable energy and resources.
central banks around the world provided unprecedented fiscal 3. China + 1 sourcing strategy
and monetary stimulus into the system to calm capital markets Production relocation or trade redirection will continue to see
and to stabilize economic growth in their respective countries. multinational and Chinese companies relocating or setting up
new factories in the region.
A series of “Black Swan” events created opportunities. The 4. Factory automation
portfolio has evolved from leveraging on the beneficiaries We believe that this trend will help companies overcome the
of work-from-home and eat-at-home trend to positioning issues of labor shortage and enhance productivity. 5G and IoT
for a gradual recovery of economic activities as people and enable automation of more business processes.
businesses adjust to living with COVID-19. 5. Digitalisation of economy in South East Asia
We expect digital adoption in South East Asia to play catch up
Moving forward, Covid-19 vaccines have been successfully with China and this certainly represent an interesting opportunity
tested and will be rolled out from 2021. There is hope that the for investors in the region in the near term.
coronavirus will be controlled, after which countries around
the world may slowly rebuild their economies. While it may
take some time before vaccines reaches the mass population, GDP growth forecast ranges - Asia ex
the impact of COVID-19 may not be as severe as initially felt Japan (%)
as people and management of companies are better prepared
and learned to adapt to living with COVID-19. Companies who 14%
survived up to this stage stand to gain market share from those
12%
who did not.
10%
Economic Growth in 2021 8%
During the onset of COVID-19 outbreak, Asia ex-Japan
6%
economies manage to avert a severe shock to the system
thanks to swift fiscal response from the governments. Looking 4%
ahead, consensus estimated that Asia ex-Japan economies will 2%
grow at a rate of 5.5% yoy in 2021. Growth in China and India Median
0
is estimated at 8-9% yoy, outpacing growth in other countries
a
an
a
ng
re
ia
d
sia
es
m
a
in
re
di
n
s
na
po
in
iw
Ko
la
within the region. Whilst the absolute growth figure appears
ne
ay
Ch
In
Ko
pp
ai
et
a
Ta
al
do
ng
g
Th
Vi
h
ili
M
on
ut
In
Ph
Si
H
So
high, it is worth noting that it is derived from an abnormally low
base in 2020. Overall, we expect economic recovery in the region Source: Bloomberg, 15 December 2020
Source: Manulife Investment Management. Date: December 2020. Unless otherwise stated all views expressed are proprietary to Manulife Investment Management.
12 13Indian Equities Latin American Equities
position, healthy forex reserves and RBI intervention are working for home. In the case of Banks, we favor the Brazilian
ICICI Prudential Asset expected to keep the Indian rupee largely stable. Itaú Asset Management banks, as they are strongly capitalized and made excess
Management Company Ltd. Nordea 1 - Latin America Equity Fund provisions in the beginning of the Pandemic. The delinquency
has been way better than previous estimates, so current
Nordea 1 - Indian Equity Fund Forex reserves addition highest among EMs • More optimistic outlook for the region, as vaccine 100%
provisions are likely to be reversed, therefore increasing profits.
• Mobility and activity levels have improved significantly USD bn developments advance at a faster pace, and the global
140 30%
80%
as the economy unlocks monetary liquidity finally starts to reach Latin America Global investors have never been so under-allocated to Latin
120 25%
• Structural reforms set the stage for strong re-bound in • Emerging Markets (EM), including Latin America, America
60%
and that has already begun to change with a strong
100
growth in the coming years 20% appear as investment opportunities for global investors flow of international capital in October, November and month-
80
since valuation in the region is attractive do-date December. Economic recovery and valuation gap
• Markets are at record highs; India’s P/E premium to 15% 40%
60 between developed markets and emerging markets, including
Emerging Market’s (EM) close to long term averages 10%
40 Latin
20%
America, prompted this flow. We believe it will continue as
20
5% The economic recovery process, post-Pandemic, has been valuation in the region is attractive. Chile for instance, trades at
0 0 different from the period post-GFC (Global Financial Crisis). In a 10%
significant discount to its own historical valuation, and Brazil
India witnessed one of the most stringent nationwide lockdown summary, most developed economies reacted essentially with trades basically at its historical average, which is unusual in a
-20 -5%
resulting in sharp GDP contraction of 23.9% yoy in the second India China Taiwan Thailand Russia Korea Indonesia Malaysia Brazil S. Africa monetary stimulus, which were not coordinated by Central world
0
with such liquidity.
quarter of 2020. The Government and Royal Bank of India Fx Reserves addition (LHS) % change over 2019 (RHS) Banks or even simultaneous. Despite substantial liquidity, banks 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
(RBI) instituted several measures to support the economy were under-capitalized and not willing to lend at that time. This INDEX A INDEX B INDEX C INDEX D INDEX E
Source: Bloomberg; Data for the period from 31 Dec 2019 to 30 Nov 2020.
through the lockdown by way of financial relief to mitigate the time around governments´ responses to the crisis have been
Ibovespa 10Y Historical P/E F12M Ratio
hardships faced by the poor, collateral free loans to Medium One concern has been retail inflation which has surpassed RBI’s a combination of monetary and fiscal stimulus, and they have
and Small Enterprises, credit facilities for farmers, street tolerance band of 6% for three consecutive quarters. Much of been coordinated and implemented at the same time, creating 22
vendors, liquidity injection in the form of rate cuts, long term the high inflation is attributed multiple supply side shocks and the biggest growth stimulus ever seen. Also, banks´ balance
20
repo operations, moratorium for debt repayments etc. Several high food prices. A gradual return to normalcy as supply side sheets are much stronger now and there is a disposition to lend.
high frequency indicators are now already trending at pre-Covid disruptions fade and a favorable base effect should help in In this scenario growth is no longer scarce. 18
levels. Manufacturing PMI has increased to its highest reading bringing back inflation to RBI’s comfort zone by second half of
16
since January 2012. The economic reversal has come despite 2021. Because of growth scarcity, growth assets were in short supply.
Government’s conservative fiscal stance compared to other At the same time technological development provided a 14 13.8
13.2
EM’s. Real GDP growth of India has been remarkably steady for We look forward to 2021 with hopes of normalization in business new variety of assets available to investors. This environment 12 11.7
the last three decades; 6.5% -7% yoy growth. and pick up in earnings. Low interest rates, structural changes in prompted growth assets to strongly outperform value assets. 11.7
cost structures by variabilising fixed cost in the post pandemic Latin American equity markets were poor in “tech” assets and 10
11.7
The Government has already set the ground for a strong set up, lower corporate taxes and re-bound in the economy rich in value assets, such as commodities, banks and telecom 8
economic growth over the next decade through passage of should lead to recovery in earnings for most corporates. stocks.
bold reforms. India has been ahead of the global curve both Equity markets are currently at record highs supported by 6
2010 2011 2012 2013 2014 2015 2016 2107 2018 2019 2020 2021
in terms of digital penetration and access to mobile first unprecendented global liquidity, strong foreign portfolio flows These sectors are very relevant to Latin American equity markets
Ibov P/E F12M Average + 1 Std DV – 1 Std DV P/E 2020 P/E 2021
technologies. Policy makers are contemplating measures to and hopes of a vaccine rollout. The rally is broad based across and heavy representative in their benchmarks. Financials and
boost manufacturing and infrastructure spending to be able sectors; valuations across market caps have converged. Quality commodities represent more than 50% of the Ibovespa index Source: Bloomberg, as of 15.12.2020
to optimize the opportunity in global supply chain shifts. The and growth style have outperformed value style so far, however, for instance, the most popular benchmark in the Brazilian
Government’s 5-year Production Linked Incentive scheme since the positive news of the vaccine, a reversal is underway. equity market. Banks and telecom companies are also relevant
30
(PLI) to companies that manufacture electronics hardware and Though markets look expensive on 1-year forward PE basis to the Mexican equity market, and commodities specifically are
25
pharma has been well received. Buoyed by the success of this but adjusting for low yields and relative to EM’s valuations, relevant to all markets in Latin America. Developed economies
20
scheme, the PLI has been expanded to 10 more sectors with a India is trading at average levels. EM portfolio positioning in and China were in the late cycle of economic growth (growth
15
cumulative outlay of USD 20bn over next 5 years. India is close to decadal lows which could attract further flows decelerating) previous to the Pandemic, which is not a period
10
supported by an improving earnings cycle, stronger economic favorable to commodities. The Pandemic put the whole world
On the macro front, policy rates have been cut. This combined recovery and policy momentum. From a sector perspective we into a recession and also, as mentioned above, all developed 5
with surplus liquidity has led to speedy monetary transmission. expect domestic cyclical sectors like Financials, Real Estate and economies and China back into an early stage of the economic 0
Lending rates have fallen the sharpest in nearly a decade. We Industrials to do well as private capex cycle picks up spurring growth with monetary and fiscal stimulus. This is a perfect -5
are seeing early signs of pick up in credit growth in housing economic growth. environment to commodities. In fact, we have seen fast growing -10
loans, auto loans, personal loans etc. India accumulated forex demand for iron ore, copper, steel, and other commodities that -15
D
7
19
reserves accretion of USD 117bn from Jan to Nov 2020 which is Latin America has a position of dominance. At the same time,
5
6
8
9
10
11
12
13
14
15
16
17
18
0
YT
0
0
0
0
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
the highest among EM’s (see chart on the right). The total forex there is no supply to keep up with the growing demand. The MSCI Nordic Index MSCI Europe Index
reserves are at record high of USD 575bn which translates to Pandemic also generated more demand for Telecommunication
an import cover of 17 months. A favorable Balance of Payments services as more people are and probably will continue to be
12 % 1.400 bps
The current U.S. REIT implied cap rate
spread to investment grade corporate 1.200 bps
Source: ICICI Prudential Asset Management Company Ltd. Date: December 2020. Unless otherwise stated all views expressed are proprietary to ICICI Prudential Asset Management Company Ltd. Source: Itaú Asset Management. Date: December 2020. Unless otherwise stated all views expressed are proprietary to Itaú Asset Management. bonds is over 100 bps above the
10 %
long-term average spread. 1.000 bps
14 8%
800 bps 15
600 bpsYou can also read
