The new year is expected to deliver a strong economic rebound with a cyclical recovery leading the way, according to independent investment consulting firm Evergreen Consultants.
Angela Ashton, Evergreen Consultants founder and director, said a benign cyclical recovery from a low base of economic activity in 2020 was expected, but successful vaccine deployment is critical.
“Whilst there are risks that relate to the rollout of the vaccine which underpin this economic theme, it is the most likely outcome at the moment,” Ashton said.
“Based on this theme, we see the continuation of growth assets outperforming defensive assets as cash rates stay low, governments continue to have aggressive bond purchasing programs (QE) and TINA (i.e. equities as the last man standing – There Is No Alternative).”
Economies with the greatest operating leverage were expected to benefit the most, and exporters such as Japan, emerging markets and Australia should outperform.
“Based on a benign cyclical recovery which assumes interest rates do not rise, we remain overweight credit but have taken some profits in the sector having benefitted from tightening spreads,” Ashton said.
“We have offset some of the risk of this overweight position with a continued preference towards higher credit rating (A and above) but would consider moving lower in grade to capture higher yields. Spreads are expected to contract further over the short to medium term.”
Ashton said a risk to the outlook was the growing disparity between returns to labour and capital throughout the broader economy.
“Stronger productivity growth has outstripped real wages growth such that the wage share in national income has moved to a 60-year low of 49% while the profit share has risen,” Ashton said.
“If wages growth remains stalled during the recovery, then as savings decline this will push households further into debt if they are to maintain spending.
“However, the Federal government is promising further tax cuts, which if passed, should help boost disposable income.”
If the deployment of vaccines was successful then Europe and North America should continue to build momentum in the first half of 2021 which should pave the way for a further rotation into value and cyclicals.
“This is not to say that growth style equities are to be avoided; rather, the stars are aligning for traditional value plays,” Ashton said.
“This will particularly be true if long term bond yields are able to edge higher as this will have a proportionately larger earnings impact on long duration growth stocks.”