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Global tech, emerging markets and pandemic uncertainties: opportunities and risks in 2021

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What does 2021 hold for the investment world? For a fund manager, that is a multibillion-dollar question. FTfm asked investment bosses and strategists at 10 of the world’s biggest asset managers to gaze into their crystal ball.

Pascal Blanqué

CIO, Amundi Asset Management

© Magali Delporte

What should investors expect?
The recovery will accelerate with the vaccine, but stop and go phases will persist. We expect further pressure on fiscal and monetary policy for more stimulus.

China and parts of Asia will lead the recovery, while the rest of the world will follow. With low rates and tight spreads, equities will be the place to go with the great rotation towards value set to continue.

We prefer Europe, Japan and emerging markets. With a record €18tn in negative yielding debt, the search for income will intensify. Emerging market bonds, private debt and real assets will be the place to look in the search for decent yield.

Biggest risk?
The burst of the hypergrowth bubble. Valuations [for growth stocks] may not seem excessive compared to US Treasuries, but rising bond yields will reveal who is swimming naked in the pool.

Biggest opportunity?
Emerging market equities are our top choice, but selection and rotation of themes will be important. Asia first, followed by Latin America and CEMEA [Central and eastern Europe, Middle East and Africa] using a balance between growth and value.

Quirkiest prediction?
Frontier markets will be the winners. They trade at a wide discount to emerging markets. Our choices are Vietnam, for its hub positioning, and Kazakhstan as a significant beneficiary of the New Silk Road.

Where will the S&P 500 be at year end?
About 4,000 is achievable assuming the tech bubble does not burst.

Jean Boivin

HEAD OF the BLACKROCK investment INSTITUTE

What should investors expect?
We are bullish on risk assets for 2021 with an expected vaccine-led acceleration of the global economy. This has now become consensus. But we think there is more to the story. What makes us different?

First, we believe traditional business cycle logic doesn’t apply to the virus shock, which is more akin to a natural disaster. 2021 is not simply about a typical broad-based cyclical recovery — it will be about picking sectors amid an uneven restart.

Second, we think we are entering a “new nominal”. The macro policy revolution implies a muted response of central banks to rising inflation. The resulting combination of stable low yields with rising inflation will support equities. 

Biggest risk?
We see two major near-term risks. On the downside, significant delays in the deployment of effective vaccines that could make it harder to prevent longer term scaring. On the upside, an unleashing of pent-up demand that takes markets by surprise.

Biggest opportunity?
Take a sectoral approach. We like global tech and healthcare due to the pandemic’s transformative shifts — and balance this with prime beneficiaries of the economic restart, such as emerging market equities.

Quirkiest prediction?
Real rates continue to fall even as an accelerated restart implies near-term quarterly growth rates that will seem outsized compared to a usual recovery.

Where will the S&P 500 be at year end?
We have upgraded US equities to overweight. We see the tech and healthcare sectors offering exposure to structural growth trends, and US small-caps geared to an expected cyclical upswing in 2021.

Joanna Munro

CIO, HSBC Asset Management

© Dave Vickers

What should investors expect? 
We expect the global economy to enter a restoration phase, although the pace of recovery will vary by region. This will depend on how much output was lost in 2020; how quickly vaccines are rolled out; and the degree of policy support.

The high level of policy uncertainty seen in recent years is also likely to decline, with the US taking a more multilateral approach to global issues and “lower-for-even-longer” interest rates as central banks attempt to push inflation higher.

However, investors need to be realistic about the returns that can be achieved this year, given the strong market performance in 2020.

Biggest risk? 
Uncertainties around the pandemic remain substantial, particularly how quickly vaccines can be rolled out. The market has priced in a lot of good news on this front in recent weeks.

Biggest opportunity? 
In a year of restoration, allocating to equities still makes sense, but we need to be dynamic in managing regional exposures. Emerging Markets fixed income should benefit from a weaker dollar.

Quirkiest prediction?
The diversification properties of government bonds could deteriorate further. There is a strong case to look for alternative diversifiers, including illiquid alternatives such as securitised and private debt, or multi-strategy hedge funds.

Where will the S&P 500 be at year end?
There is scope for US stocks to make further gains. Significant tech and quality exposure remains a positive, while cyclical parts of the market can potentially benefit from fiscal stimulus measures. However, we need to be realistic about the scale of returns, given valuations are no longer cheap.

Kristina Hooper

Chief Global Market Strategist, INVESCO

What should investors expect? 
The stock market will largely look through Covid-related economic headwinds in the very near term to the broad distribution of vaccines, which should be the catalyst for a strong economic recovery.

That means equities should outperform fixed income as growth moves above trend, the global earnings cycle recovers and risk assets are supported by ample money supply growth. I expect this environment to favour cyclical and smaller capitalisation stocks.

I also expect that the economic expansion, positive fundamentals and accommodative policies will continue to generate positive credit conditions over the next year.

Biggest risk? 
While this is extremely unlikely, I believe the biggest risk to the stock market is central banks, especially the US Federal Reserve, removing accommodation too soon.

Biggest opportunity?
An improving risk appetite, a depreciating US dollar and better control of the virus should lead to outperformance in Asia emerging markets in 2021.

Quirkiest prediction?
Cryptocurrency history repeats itself. After its massive rally in 2020, Bitcoin falls hard in 2021 just as it did in 2018.

Where will the S&P 500 be at year end?
4,350

Sonja Laud

CIO, Legal & General Investment Management

© Andy Lane

What should investors expect?
Even though the world economy’s immediate prospects may have darkened, growth could still be strong in 2021. This is because the rollout of safe and effective vaccines could accelerate a return to something approaching normality.

We believe this fundamental backdrop should boost equity markets in particular, as investors start to see a potential end to the economic and social hardship of the past year.

In fixed income, we continue to believe in our “lower for longer” theme, seeing limited upside potential for government bond yields. Low yields, easy monetary policy and a recovering economy also provide a supportive backdrop for credit.

Biggest risk?
Premature fiscal and monetary tightening. China appears keen to rein in excessively loose policy following another huge credit expansion, and will probably have to tread a tightrope to avoid market stress.

Biggest opportunity?
We expect investors increasingly to stress-test their portfolios for climate change and align to particular temperature outcomes. The opportunity is to stay ahead of this massive trend.

Quirkiest prediction?
Despite secular headwinds from the energy transition, oil could see a strong rally in 2021 as the economy rebounds and cheap prices temporarily encourage energy inefficiency.

Where will the S&P 500 be at year end?
The S&P’s strength in 2020 has been driven by a handful of tech stocks. We still like this sector, and the index, given strong earnings — but sentiment risks becoming overly exuberant.

Johanna Kyrklund

CIO, Schroders

What should investors expect?
2021 will be a year of economic normalisation as individuals slowly come out of “hibernation”. Although equities have rallied strongly in 2020, we still see opportunity in more cyclical sectors and countries. Bonds, on the other hand, offer little value, particularly in Europe.

We also view Covid-19 as “the great accelerator” as it has accentuated some pre-existing themes, which remain in place for 2021. For example, energy transition as governments focus on “green infrastructure”, climate change more broadly and technological disruption. 

Biggest risk?
Although fiscal stimulus is acting as a bridge to better times, the longer we struggle to get the virus under control, the more likely we are to experience private sector scarring.

Biggest opportunity?
A rise in inflation, accompanied by steeper yield curves, would prompt a significant rotation in markets, unleashing pent-up return potential in some of the more “value-driven” areas of the market.

Quirkiest prediction?
Reports of the US dollar’s demise are greatly exaggerated. I will keep some dollars up my sleeve in 2021 as they are a reliable haven and US assets remain attractive. 

Where will the S&P 500 be at year end?
4,000

Lori Heinel

DEPUTY CIO, STATE STREET GLOBAL ADVISORS

What should investors expect?
We anticipate a strong global economic recovery, as vaccine deployment allows pent-up demand in service industries to materialise. But that strong headline figure will obscure considerable differences across countries and sectors. Momentum will fluctuate notably over the course of the year.

We are watching for signs of vulnerability and bubbling volatility, especially as the global economy progresses toward the next phase of the recovery: the transition to autonomous growth, in which underlying demand will have to compensate for the gradual withdrawal of policy support.

We see the strongest prospects for economic growth in North America and in China, which will warrant particular attention from investors.

Biggest risk?
Inflation data is likely to surprise, given year-over-year comparables, leading to a market reassessment of underlying inflation risk with potential for a back-up in rates and equity market re-rating.

Biggest opportunity?
A robust recovery could trigger a rally that expands to include some of the most unloved value stocks. Investors may also start to take notice of value companies’ recent efficiency improvements, which in turn could drive a more durable value rally.

Quirkiest prediction?
With money flowing abundantly, scarce assets will be in demand. Investors will look far beyond conventional choices like gold; expect them to bid up cryptocurrencies.

Where will the S&P 500 be at year end?
3,900, driven by an earnings reset.

Hiroyuki Horii

CIO, Sumitomo Mitsui Trust Asset Management

What should investors expect?
With the uncertainty around the US election over, we will enter the expansionary phase of the business cycle in 2021. Despite the Covid-19 pandemic continuing to suppress the recovery, support through monetary policies and fiscal stimulus measures will boost the global economy.

Many companies are in good shape, having adjusted cost structures and strengthened cash reserves in response to the economic slowdown. As business activity gets back to normal, we expect increasing opportunities for M&A and share buybacks.

In Japan, digitalisation and decarbonisation, two key objectives for prime minister Yoshihide Suga, will drive the economy. Stronger profits delivered by improved corporate governance will be another tailwind.

Biggest risk?
Central banks are keeping the world economy afloat. Once they signal they are beginning to taper, the prospect of rapid inflation and long-term interest rate rises will loom large as potential risks.

Biggest opportunity? 
Pressure for action on climate change will only increase, creating opportunities for investors in green technology and other innovative methods to cut emissions.

Quirkiest prediction?
The relationship between the US and China may begin to thaw as a result of the need for joint action on climate change, although tensions will continue, especially over the tech industry. 

Where will the S&P 500 be at year end?
With an expansionary business cycle and strong corporate earnings, the S&P 500 will reach 4,200 by the end of 2021. Elevated equity [valuation] multiples should prove resilient as the low-interest environment is likely to persist. The excess cash held by businesses and higher consumer saving will continue to support equity markets.

Mark Haefele

CIO, UBS Global Wealth Management

What should investors expect?
Widespread availability of coronavirus vaccines by the second quarter, further fiscal stimulus and continued easy monetary policy will support the economic recovery and enable corporate earnings in most regions to recover to pre-pandemic levels by the end of the year.

Although some economic recovery is priced in, we see further upside for global equities and expect the more economically sensitive markets and sectors, which underperformed for much of 2020, to outperform in 2021. Our preferred areas include small- and mid-caps, select financial and energy names, and UK equities.

Biggest risk?
The biggest risk would be a mutation in the coronavirus that renders the various vaccines ineffective. This would threaten to take us back to square one in dealing with the pandemic.

Biggest opportunity?
Investing in 2020 was about going resilient, large and American. 2021 will be about going cyclical, small and global as the stocks most affected by the pandemic continue to revive.

Quirkiest prediction?
We expect the recovery to lift commodity producers’ currencies, notably the Russia rouble, Australian dollar, Norwegian krone, and Canadian dollar.

Where will the S&P 500 be at year end?
The backdrop for stocks looks favourable, with a revival of corporate profits and continued policy support from the Fed. We see the S&P 500 at 4,000 by the end of 2021.

Greg Davis

CIO, Vanguard

© Carlos Alejandro

What should investors expect?
Health outcomes will drive the economy as the virus continues to influence the trajectory of the recovery. As vaccination efforts proceed and we get closer to herd immunity, labour market scarring and business bankruptcies (which have remained low) will take centre stage after output gaps begin to close.

Longer-term, we expect the post-virus global economy to look like it did before the virus. We expect inflation to rise in early 2021 due to base effects, but not to persist. Our market outlook is one of lower returns for the next decade due to high valuations in equities and lower interest rates in fixed income.

Biggest risk?
Near-term, the biggest risks are the health outcomes and the pace of vaccination. Longer-term, our outlook hinges on globalisation trends, productivity growth and the output gap.

Biggest opportunity?
Long-term focus and disciplined asset allocation are as important now as they ever were. We see opportunities for equities outside the US and value stocks to outperform over the next decade.

Quirkiest prediction?
Inflation will stay low and the major central banks will have difficulty meeting their inflation targets.

Where will the S&P 500 be at year end?
Difficult to predict, but current valuations are above our fair value range. We continue to see upside in non-US equities due to higher valuations and slower earnings growth in the US.



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‘Digital big bang’ needed if UK fintech to compete, says review

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Sweeping policy changes and reform of London’s company listing regime will spark a “digital big bang” for the City and turbocharge the UK’s fintech industry, according to a government-commissioned review.

The report, to be published on Friday, warns that the UK’s leading position in fintech is at risk from growing global competition and regulatory uncertainty caused by Brexit

The review, carried out by former Worldpay chief Ron Kalifa, is one of a series commissioned by the government to help strengthen the UK’s position in finance and technology.

Both sectors are under greater threat from rivals since the UK left the EU in January amid growing global competition to attract and retain the fastest growing tech start-ups. 

Changes to the UK’s listing regime are recommended, such as allowing dual-class share structures to let founders maintain greater control of their companies after IPO. The review also proposes a lower free-float threshold to allow companies to list less of their stock.

Kalifa said the rapid evolution of financial services, from online banking and investment to digital identity and cryptocurrencies, meant that the UK needed to move quickly.

“This is a critical moment. We have to make sure we stay at the forefront of a global industry. We should be setting the standards and the protocols for these emerging solutions.”

John Glen, economic secretary to the Treasury, said more than 70 per cent of digitally active adults in the UK use a fintech service “but we must not rest on our laurels . . . all it takes is a bit of complacency to slip from being a leader of the pack to an also ran”.

He said the government would consider the report’s recommendations in detail. 

The review was welcomed by executives at many of the UK’s largest fintechs and leading financial institutions such as Barclays. Mark Mullen, chief executive of Atom Bank, said the review was “essential to maintain momentum in this key part of our economy and to continue to drive better — and cheaper outcomes for all of us”.

The review also recommended the government create a new visa to allow access to global talent for tech businesses, a move likely to be endorsed by ministers as early as next week’s Budget, according to people familiar with the matter.

Fintechs have been lobbying for a visa scheme since shortly after the 2016 Brexit vote, but the success of remote working since the onset of the coronavirus crisis has reduced its importance for some firms.

Revolut, for example, has ramped up its hiring of fully remote workers in Europe and Asia to reduce costs and widen its potential talent pool, according to chief executive Nik Storonsky.

Charles Delingpole, chief executive of ComplyAdvantage, a regulatory specialist, agreed that fintech was becoming more decentralised. He added that the shift in tone from the government could have as big an impact as specific policy changes. “Whilst none of the policies is in itself a silver bullet . . . the fact that the government recognises the threat to the fintech sector and is publicly acting should definitely help.”

The review also proposed a £1bn privately financed “fintech growth fund” that could be co-ordinated by the government. It identified a £2bn fintech funding gap in the UK, which has meant that many entrepreneurs have in the past preferred to sell rather than continue to build promising companies. It wants to make it easier for UK private pension schemes to invest in fintech firms. 

The report also recommended the establishment of a Centre for Innovation, Finance and Technology, run by the private sector and sponsored by government, to oversee implementation of its recommendations, alongside a digital economy task force to align government efforts.

The review has identified 10 fintech “clusters” in cities around the UK that it says needs to be further developed, with a three-year strategy to support growth and foster specialist capabilities.

Dom Hallas, executive director at the Coalition for a Digital Economy (Coadec), said it was now important that people “follow through and actually implement” the ideas in the review. The sector’s direct contribution to the economy, it is estimated, will reach £13.7bn by 2030.

However, the review also raised questions over the role of the Competition and Markets Authority, saying that the CMA should better balance competition and growth. 

“There is a case for more flexibility in the assessment of mergers and investments for nascent and fast-growing markets such as fintech,” it said. 

“Success brings scale but as some businesses thrive, others inevitably will fail. Some consolidation will therefore be critical in facilitating the growth that UK fintechs need in order to become global champions.”

Charlotte Crosswell, chief executive of Innovate Finance, which helped produce the report, said: “It’s crucial we act on the recommendations in the review to deliver this ambitious strategy that will accelerate the growth of the sector.

“The UK is well positioned to lead this charge but we must act swiftly, decisively and with urgency.”



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Coinbase: digital marketing | Financial Times

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Coinbase will be a stock riding a runaway train. The US cryptocurrency platform wants investors to think long term about the prospects for a global “open financial system”. Most will be unable to tear their eyes away from wild, short-term price swings in bitcoin, the world’s largest digital asset. 

This has its benefits. Coinbase, which has filed for a US direct listing, makes most of its money from commissions on crypto trades. Sales more than doubled to $1.3bn last year. The company has swung from a loss to net income of $322m as crypto prices jumped.

But the company has given no detail on the financial impact of the 2018 bitcoin price crash. Will Coinbase’s 2.8m active retail users and 7,000 institutions hang on if there is another protracted price fall? 

Coinbase was valued at $8bn in a 2018 private funding round and $100bn in a recent private share sale, according to Axois. That rise looks remarkably similar to the increase in bitcoin’s price from less than $5,000 to more than $50,000 this year.

The rally is hard to justify. Bitcoin has not become a widely used currency — nor is the US ever likely to countenance that. It offers investors no yield. Volatility remains high. Elon Musk’s tweet this weekend that bitcoin prices “seem high lol” propelled a sharp fall that hit shares in crypto-related companies. Shares in bitcoin miner Riot Blockchain have lost a quarter of their value this week. 

Prospective investors in Coinbase should keep this in mind. Its listing will take cryptocurrencies further towards the financial mainstream. But risk factors are unusually numerous, including the volatility of crypto assets and regulatory enforcement. 

Both threats are widely known. Another risk factor in the listing document deserves more attention. Vaccination campaigns and the reopening of shuttered sectors of the economy is raising yields in safe assets such as Treasuries. Risky trades may become less attractive. Coinbase might be about to go public just as the incentive to trade cryptocurrencies is undermined. 

If you are a subscriber and would like to receive alerts when Lex articles are published, just click the button “Add to myFT”, which appears at the top of this page above the headline.

This thread is closed to comments due to a history of posts on this subject that breach FT user guidelines



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US stocks make gains on Fed message of patience over monetary policy

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Stocks on Wall Street reversed earlier losses after Jay Powell, the Federal Reserve chairman, reiterated the central bank’s desire to stick with accommodative policies during his second day of testimony to Congress.

The tech-heavy Nasdaq Composite ended the day up 1 per cent, having fallen almost 1 per cent at the opening bell. The S&P 500 climbed 1.1 per cent, marking the blue-chip benchmark’s second consecutive rise after five sessions of back-to-back losses.

A morning sell-off in US Treasuries also faded, with the yield on the 10-year note having climbed as much as 0.07 percentage points to slightly less than 1.43 per cent, its highest level since February last year, before settling back to 1.37 per cent.

Treasuries have been hit by expectations that US president Joe Biden’s $1.9tn stimulus plan will stoke inflation, which erodes the cash value of the debt instruments’ interest payments. However, the more recent rise in yields has also been accompanied by a rise in real rates, which are more indicative of the return investors make after inflation and signal an improving growth outlook for the economy.

Higher yields, which move inversely to the price of the security, also knock-on to equity valuations by affecting the price-to-earnings multiples investors are willing to pay for companies’ shares. A higher yield, analysts say, makes fast-growth companies whose earnings represent a slim proportion of their stock market value less attractive in comparison.

Shares in the 100 largest companies on the Nasdaq are valued at a multiple of 37 times current earnings, against 17 times for the global FTSE All-World index of developed market equities.

“When bonds yield close to zero, you are not losing out by investing in those companies whose cash flows could be years into the future,” said Nick Nelson, head of European equity strategy at UBS. “[But] as bond yields start to rise, that cost of waiting [for companies’ earnings growth] increases.”

Earlier on Wednesday, investors’ retreat from growth stocks rippled into Asia. Hong Kong’s Hang Seng index sank 3 per cent, its worst daily performance in nine months. Chinese investors using market link-ups with bourses in Shanghai and Shenzhen dumped Hong Kong-listed shares at a record pace, selling a net HK$20bn ($2.6bn) on Wednesday. China’s CSI 300 index fell 2.6 per cent. Japan’s Topix slipped 1.8 per cent, dragged down by tech stocks.

Column chart of Hang Seng index, daily % change showing worst day for Hong Kong stocks in 9 months

European equity markets closed higher, with the Stoxx 600 regional index rising 0.5 per cent and London’s FTSE 100 index up 0.5 per cent. UBS’s Nelson said European equities were less vulnerable to rising yields because European stocks generally traded at lower valuations than in Asia and the US. “We have fewer big technology companies here.”

While the bond market ructions have unsettled many equity investors, some believe this should not affect stock markets because the inflation expectations that have driven the Treasury sell-off are linked to bets of a global recovery.

“Rising bond yields and rising inflation from low levels provide a historically attractive environment for equities,” said Patrik Lang, head of equity strategy and research at Julius Baer. Traditional businesses whose fortunes are linked to economic growth, such as “industrials, materials and especially financials”, should do better in a reflationary environment than tech stocks, added Lang.



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