Quarterly Asset Allocation - Q1 2021

1Q Investment Outlook: Equity assets should continue to outperform

 

Q: Principal Asset Management (Asia) Investment Management Team

A: Crystal Chan, Principal Asset Management (Asia) Senior Investment Specialist

 

Q: Will the global economy continue its strong recovery in 2021?

A: Global confirmed cases of COVID-19 continued to surge. Under the influence of the new wave of the pandemic, economic activities in major regions have once again been constrained. While the global economic recovery was held back in the fourth quarter, the economies of some countries and regions may still contract further in the first quarter. However, when looking at the whole year the global economy is expected to grow by about 5% which would reverse the contraction in 2020. The most significant driver for growth is the prospect of various vaccines which could be widely utilized in the first half of 2021. Secondly, the support of large-scale fiscal and monetary policies is also important. Supported by these factors, economies are expected to restart in the second half of the year.

Q: Will there be further upside to the global stock market? How should equity assets be allocated in the first quarter?

A: Highly correlated with the economy, almost every economic recession triggered a sharp retreat in the stock market. As the economy recovered, the stock market also rebounded. Looking back at the past 50 years, the United States had experienced 6 economic recessions. After the stock market fell sharply, it rebounded to peak before the next economic recession. The process took 8 months to nearly 11 years while the average gain in these periods was 2.2 times.

We believe that this time is no exception. The positive news on the vaccines has not been fully digested by the market. Moreover, fundamentally, global corporate earnings are expected to return to growth. In this low interest rate environment, capital may further flow out of the money market and deploy into risky assets. The high valuations of global stock markets are likely to sustain. 

In the first quarter, we are still optimistic on equities. Among them, the Asian market has been revised upward to bullish, while the US and Japanese markets are slightly bullish. China and Hong Kong are neutral, and Europe is slightly bearish.

Q: Will sector rotation speed up?

A: With support of company profit outlooks, technology stocks outperformed the market in 2020. In the new year it will be more difficult for the very high valuations and significant earnings growth to sustain as there are growing regulatory risks. These items may apply pressure to the growth of the industry. On the other hand, if the vaccines are widely adopted and drive the economy, it will support a steeper yield curve which may help value stocks rebound as they have a higher economic correlation. Based on fundamental analysis, the earnings of traditional sectors such as energy, industry, materials and finance are expected to improve next year. The valuations of these stocks are also relatively reasonable. This may support the related old-economy stocks or cyclical sectors to extend its dominance from the end of last year.

 

Crystal Chan
Senior Investment Specialist
Principal Asset Management (Asia)

 

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