As we aim to find stability in the new decade, there is also the fact that this decade could see disruption to technology, work style and wealth creation techniques like never before. As the world watches new economies empower themselves and move into the wealth creating segments, investor awareness is only set to grow. In our bid to help our readers and investors understand as to what to expect from 2021, we interviewed Tuan Huynh, Chief Investment Officer Europe and Asia at Deutsche Bank International Private Bank. In this interview he shares his views on investment insights, right from macros and markets to impact investing.
Marco-economic indicators: Inflation, the cautious consumer and budget deficits “CAN” plague 2021
One of the key macro-economic indicators to look-out for is inflation. Although the immediate threat from inflation at present appears low, the continued spare capacity and still cautious consumers in many markets – driven in part by continuing fears around unemployment, can unfold later in the year. Secondly, expansionary fiscal policy and escalating budget deficits have exacerbated an existing trend of debt escalation. Rising levels of debt have not so far unsettled the financial markets as there are still willing buyers for government debt, but these worries could unfold too. Meanwhile, countries may also face increasing demographic pressures from the ageing population. There is further a concern for markets and the possibility of a rise in government yields during 2021 is a real one.
Geopolitics: Mending the U.S-China relation will take longer than expected
With a new administration occupying the White House, a multilateral approach is expected to take the U.S.’s continental neighbors and European partners out of the cross-hairs for future disputes. By contrast, tensions across the Pacific are likely to remain largely unresolved, but potential next steps will likely be more measured. The new administration also brings new hope – a potential trade dialogue between U.S.A and China. Yet, a quick turnaround in resolving tensions in trade, financial and technology areas seem highly unlikely. One of the reasons why trade talks may remain on shaky grounds can be attributed to the news around the delisting of Chinese firms in the U.S. While this may complicate matters, President Biden’s administration is expected to take a more multilateral approach, and his actions in the initial days of being sworn-in have already helps the markets. Coming to the markets, the current focus of Biden administration is on the domestic fiscal stimulus packages, which is broadly supportive of market sentiment. To sum it up, any escalation of any kind between U.S and China could impact the market.
Asset Allocation: Emerging Markets Asia and U.S. Equities remain the focus
Coming into 2021, we believe a prudent positioning should still be appropriate, due to uncertainty related to Covid-19 and its far-reaching impact. Our regional asset allocation has a small overweight in Asia ex-Japan and U.S. equities in particular. We are positive within EM Asia with a preference for China. India has sustained market momentum, but valuation is getting higher in Indian equities. Globally, markets are still sustained by liquidity provisions and therefore outlook remains positive, but also subject to the success of vaccine distribution and its efficacy.
Meanwhile, in fixed income, we have an overweight in EM hard currency bonds but an underweight in U.S. sovereign exposures. We have observed higher yields stemming from a steepening of the U.S. Treasury yield curve. Corporate credit year to date has slightly tightened, whereas high yield has gone the opposite direction, with especially high yield China property widening. The increased issuance of credit in the space does not provide any concern for the time being regarding a decrease in credit quality.
Investments: Asian equities and gold remain the favourites
The Themes: Longer-term investment themes could be attractive in 2021 and beyond, which include cyber security, 5G, healthcare, millennials, resource stewardship and the blue economy.
Speaking of Equities: There is a keen liking for EM equities (especially Asia ex-Japan) and U.S. equities. Another focus is also the small and mid-cap firms in Europe Assuming a robust fiscal/monetary support, “lower for longer” real yields, the lack of proper alternatives and the prospect of stronger economic growth will support all equities. “Growth” stocks with particular focus on Technology should still play an important role in client portfolios, as they are expected to help investors benefit from ongoing structural economic change while also providing protective characteristics against negative re-opening surprises. Further, the window for the cyclicals is likely to extend on the back of the ongoing reflation trade.
Discussing Long-term Exposure: The 2020 pandemic has re-emphasised the importance of our long-term themes, along the dimensions of technology, demographics and sustaining the world we live in. Technology once again plays an ever-increasing role in many sectors and in our lives – from healthcare through to home working. Demographics seem likely to have a growing impact on both business and government priorities and investors are aware of this impact.
Go Gold: While the gold price is currently under some pressure, we believe there could still be some upside for gold stemming from the continuation of liquidity, fiscal policy support and macro uncertainties surrounding the USD. Global recovery setbacks and/or increased evidence of inflation could provide temporary gold price boosts through higher investment demand, but USD weakness could reverse.
Impact Investment Take-away: Rise of the Blue Economy
COVID-19 further amplified the interconnectedness between Environmental, Social and Governance principles. Deutsche Bank International Private Bank brings forward a very relevant topic within the ESG world, that of biodiversity and the blue economy. The blue economy – a topic of relevance and utmost importance, is a concern for the global population. Interlinked with biodiversity, there is increasing concern for the ongoing systematic decline of the blue economy which will in a definitive manner cause social impact and associated financial risk. Further, biodiversity underpins the “ecosystem services” that humans receive from nature, and which are thought to provide regenerative returns worth around USD125 to USD140 trillion a year. The blue economy has an immediate importance for investors –in terms of both opportunities and risks. As such there is a growing interest among clients in ESG themes especially since the pandemic last year.