Year of the Ox outlook: Will developed markets conquer Covid?

Risk appetite and asset valuations are at record levels in anticipation of a strong global recovery from the pandemic. Is the outlook justified for this lunar year?
Year of the Ox outlook: Will developed markets conquer Covid?

Every Chinese New Year, AsianInvestor makes 10 predictions about developments that will affect global financial markets and the portfolios of Asian investors, especially asset owners. Today we look at how advanced economies are set to progress against the coronavirus pandemic in the Year of the Ox and the implications of their progress for investors.

Will developed markets conquer Covid-19?
(By vaccinating 70% or more of their populations and largely lifting isolation measures)

Answer: No

Countries are at very different stages in their battle against Covid-19, so some developed economies seem far more likely than others to have the outbreak effectively contained within the coming lunar year. In any case, until the pandemic is under control internationally, cross-border travel could remain restricted even in nations where domestic restrictions have been entirely lifted.

That also assumes that the vaccine rollout runs smoothly on a worldwide basis. Given how many governments, especially developed ones, have struggled in their response to the pandemic, it may be too much to hope that there will be no further major obstacles.

Indeed the problems are already mounting, with strains from the UK and South Africa proving resistant to certain types of jab. And, given that on the whole emerging economies are expected to take longer to inoculate their populations than developed ones, yet more new variants are likely to crop up, further complicating the global recovery.

On top of that, there is no guarantee that a sufficient number of people will accept the jab. For instance, just 41% of Americans said in January that they wanted to get vaccinated as soon as possible, though that is admittedly an increase of 7% since December, found a study from the Kaiser Family Foundation. A substantial proportion of citizens in various countries say they are wary of taking or would even refuse the shot.

Ultimately, AsianInvestor expects most developed markets – even those at the forefront of the vaccine rollout – to fail to innoculate 70% of their populations (that is, with the required two jabs, where needed) by the end of this lunar year.

Even those that manage to do so are unlikely to return to so-called normality, even if they can largely lift domestic restrictions – because quarantine measures and other travel-related restrictions will still be in place in respect of many other countries.

A Sebastian Raedler, head of European equity strategy at Bank of America Merrill Lynch, wrote in a note on February 19: “Any hopes that the existing vaccines do not confer protection against the new virus strains could dash hopes of a powerful recovery, leading to an unwind of the recovery trade.” 


What does this mean for markets and portfolios?

Despite the very real chance of the Covid vaccine rollout hitting major obstacles and investors’ continued sailing in uncharted waters, risk appetite is at unprecedented levels.

A net 25% of respondents to Bank of America’s monthly fund manager survey in February that they are taking “higher than normal” risk (see graph below). That is the biggest share to do so since the survey started in 1998.

Moreover, global equity allocations among those polled were their highest in 10 years, and the focus was on cyclical stocks with exposure high to commodities, emerging markets, industrials and banks relative to the past 10 years.

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Markets seem to be looking past any near-term weakness and pricing in a strong acceleration in economic activity later this year, by betting on cyclicals such as industrials and financials. Plus technology and healthcare remain hot, despite most experts feeling the former in particular looks "bubbly" after its huge run.

All of this is a little optimistic and ahead of itself. After all, Covid-19 was cited in the BofA survey as the biggest tail risk by those polled.

Even some of the more bullish experts on the coming year see retaining a balanced portfolio as prudent, perhaps with a small equities overweight. That seems sensible.

When it comes to geographies, Asia Pacific – and particularly emerging markets in the region – is a popular focus among investors globally, and is to remain so, for good reason.

In Natixis Investment Managers’ fund buyers’ survey released this month, 55% said that they would increase exposure to Asia Pacific equities (and 52% to EM equities) in the coming year, as against figures of 41% and 32% for European and US stocks, respectively. There is good reason for such thinking – and not just due to the huge outperformance of North American equities.

Asia may be largely lagging certain developed nations in terms of the vaccine rollout, but it has emerged from the pandemic stronger and faster. On top of that, countries in the region have not had to carry out anything like the levels of stimulus seen in the West, so they have more dry powder.

But investors may need to be patient: even the smartest bets on Asia could take a few years fully to realise their potential. After all, the region is also reliant on a developed world bouncing back to fuel a full recovery of its own. 


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