Investors have been given a ‘sugar high’ combination of an effective vaccine and a clearer US political outlook, but the return to normal may prove to be trickier than expected, according to Carmignac managing director Didier Saint-Georges (pictured).
It’s been one of the most tumultuous years in financial history, with violent moves in March sparked by the spread of the Covid-19 coronavirus followed by a huge, stimulus-fuelled rally. .jpg)
It has also created a stark contrast between the winning and losing sectors, namely the cyclically exposed businesses, and those unaffected or even thriving under the ‘new normal’.
Despite several effective vaccines being announced and plans of distribution well underway, investors who are optimistic about a return to normal, should consider a few things as economies and businesses enter the recovery stage, Saint-Georges argued.
He highlighted the support provided by governments and central banks in 2020, which he said was both extraordinary and highly coordinated.
“Necessity being the mother of invention, economic orthodoxy has been temporarily put on the back burner,” said Saint-Georges, who sits on the asset manager’s strategic investment committee.
However, he said a return to normal economic conditions inevitably raises the question of which direction future public policy will be headed going forward.
“It is unclear at this stage how much cooperation will be forthcoming from either EU member states or the US Senate,” he said.
“As today’s exceptional circumstances recede, the conventional advocates of fiscal restraint will come back to the charge.”
He added: “While we can reasonably expect large-scale vaccination to give a hefty boost to confidence and consumer spending, watered-down stimulus programmes will almost certainly have the opposite effect.”
As a result, financial markets could be overlooking two major obstacles to growth that still exist today, namely, increasing global debt, and underemployment.
Indeed, global debt levels have skyrocketed to new records as governments borrowed heavily to combat the coronavirus.
The debt level is expected to reach $277trn by the end of the year, representing a debt-to-GDP ratio of 365 per cent, according to the Institute for International Finance.
Additionally, the disruption to businesses and hiring during the Covid-19 pandemic has created what could be one of the toughest job markets in decades.
Saint-Georges said: “It will take a long time for an upturn to repair the colossal damage done in 2020 to a world economy already hampered by weak secular growth.
“This means the expected cyclical recovery should not be mistaken for a trend reversal at this stage.”
For these reasons, the strategist is sticking with a quality growth bias when it comes to equities.
Although he admitted, “we are also happy to see that companies exposed to the re-opening of the economy can at long last contribute to our returns”.
The inevitable need of governments to finance large deficits will ultimately require continued central bank support to avoid surging bond yields.
However, Saint-Georges said that sooner or later, “such unlimited support might end up undermining the value of currencies when money gets printed just to finance deficit spending”.
“The US dollar seems particularly in danger of falling victim to such a fate,” he revealed.
Indeed, the US dollar has been declining in value against most other major currencies over the last few months.
Performance of other currencies against the US dollar YTD
Source: FE Analytics
However, a weakening US dollar would be beneficial for countries that borrow and trade in the currency, especially emerging economies.
He believes that much of the emerging world will have a swifter economic recovery, and has an attractive position in high-growth sectors.
“In China and its sphere of influence, that boon would come in addition to the region’s two key advantages: skilful handling of the public health crisis, which has paved the way to a swifter economic recovery; and an enviable presence in major new technology segments and alternative energy,” he explained.
He also added that a possible slide in the US dollar and other currencies that face similar challenges, could be a boost for gold in 2021.
Despite the anomalous 2020 that businesses had to navigate, he argued that the performance of equities at the end of the day comes down to long-term earnings growth, which remain “the ultimate judge and jury”.
“Moreover, at a time of rock-bottom interest rates, a still sluggish world economy and worsening macroeconomic imbalances, earnings growth will remain scarce – and fragile even when it does occur,” the strategist added.
This is the reason his investment strategy will continue be constructed around four key “antifragile” types of assets going into 2021: shares of companies with predictable profit growth, China and its regional sphere of influence, winners in the energy transition, and gold miners.