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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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A blueprint for central bank digital currencies

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Britain’s choice of world war two codebreaker Alan Turing to feature on its new plastic £50 note is ironically apt, and for several reasons. His work on cryptography speaks to the new front in monetary debates — how best to protect personal data in an age of digital payments. At the same time, the discrimination the war hero faced for his sexuality shows why privacy is important, including from the government.

In an interview with the Financial Times this week, European Central Bank executive Fabio Panetta said that a digital euro would protect consumer privacy — the public’s greatest concern over a central bank digital currency, according to a consultation by the ECB. Referring to Facebook’s attempt to launch the Libra stablecoin, Panetta warned that if central banks did not provide an alternative they would cede the ground to Big Tech. Companies could then use their dominant market position to set privacy standards.

Central bank digital currencies, however, raise questions about how to protect data from the state. If CBDCs became the dominant money then central banks could have vast data repositories of nearly every transaction in an economy. The need to clamp down on illegal money laundering would mean central banks, just like commercial banks today, would not allow individuals to hold their money anonymously — linking these transactions, however compromising, to individuals.

That might be acceptable in authoritarian regimes like China, where a digital currency project is moving ahead at pace. In democracies it is not. For this reason the Bank for International Settlements is right to call for the preservation of a two-tier financial system in its annual economic report. The so-called central bankers’ central bank advocates an account-based design with regulated private banks dealing with the public and the central bank maintaining digital currencies to make the payment system more efficient. It calls for digital identities tied to these accounts — fighting identity fraud as well as money laundering.

This arms-length structure would preserve privacy — since the state could access records only once a criminal investigation begins — and allow the private and public sector to do what they do best. The BIS argues the central bank coins could work as the plumbing of the system while banks and others could innovate and have responsibility for keeping data secure. Alternative token-based designs for a digital currency could preserve anonymity but facilitate crime.

One such token in the private sector, bitcoin, is the favoured means of payment for hackers’ ransom demands, as well as for some of those avoiding tax; this week the South Korean government seized millions of dollars’ worth of cryptocurrency from 12,000 people accused of tax evasion. Monero, a cryptocurrency that promises even more privacy than the pseudonymous bitcoin, has started to become the choice of many criminals. Cash has the same problem: at one point investigators concluded 90 per cent of £50 notes were in the hands of organised crime.

A two-tier financial system means banks could, as they do at present, have responsibility for checking identities and keeping up with “know your client” rules. While state-run identity schemes such as India’s Aadhar can be used to make sure digital currencies are going to the right place, there are valid ideological questions about government-run ID schemes. The BIS blueprint is a good start for central banks considering digital currencies, but more radical steps such as handing more personal data to the central banks need more widespread consultation and support.



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Pakistan’s Gwadar loses lustre as Saudis shift $10bn deal to Karachi

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Saudi Arabia has decided to shift a proposed $10bn oil refinery to Karachi from Gwadar, the centre stage of the Belt and Road Initiative in Pakistan, further supporting the impression that the port city is losing its importance as a mega-investment hub.

On June 2, Tabish Gauhar, the special assistant to Pakistan’s prime minister on power and petroleum, said that Saudi Arabia would not build the refinery at Gwadar but would construct it along with a petrochemical complex somewhere near Karachi. He added that in the next five years another refinery with a capacity of more than 200,000 barrels a day could be built in Pakistan.

Saudi Arabia signed a memorandum of understanding to invest $10bn in an oil refinery and petrochemical complex at Gwadar in February 2019, during a visit by Crown Prince Mohammad Bin Salman to Pakistan. At the time, Islamabad was struggling with declining foreign exchange reserves.

The decision to shift the project to Karachi highlights the infrastructural deficiencies in Gwadar.

A Pakistani official in the petroleum sector told Nikkei Asia on condition of anonymity that a mega oil refinery in Gwadar was never feasible. “Gwadar can only be a feasible location of an oil refinery if a 600km oil pipeline is built connecting it with Karachi, the centre of oil supply of the country,” the official said. There is currently an oil pipeline from Karachi to the north of Pakistan, but not to the east.

This article is from Nikkei Asia, a global publication with a uniquely Asian perspective on politics, the economy, business and international affairs. Our own correspondents and outside commentators from around the world share their views on Asia, while our Asia300 section provides in-depth coverage of 300 of the biggest and fastest-growing listed companies from 11 economies outside Japan.

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“Without a pipeline, the transport of refined oil from Gwadar [via road in oil tankers] to consumption centres in the country will be very expensive,” the official said. He added that at the current pace of development he did not see Gwadar’s infrastructure issues being resolved in the next 15 years.

The official also hinted that Pakistan’s negotiations with Russia for investment in the energy sector might have been a factor in the Saudi decision. In February 2019, a Russian delegation, headed by Gazprom deputy chair Vitaly A Markelov, agreed to invest $14bn in different energy projects including pipelines. So far these pledges have not materialised, but Moscow’s undertaking provided Pakistan with an alternative to the Saudis, which probably irritated Riyadh.

Arif Rafiq, president of Vizier Consulting, a New York-based political risk firm, told Nikkei that a Saudi-commissioned feasibility study on a refinery and petrochemicals complex in Gwadar advised against it. “Saudi interest has shifted closer to Karachi, which makes sense, given its proximity to areas of high demand and existing logistics networks,” he added.

Rafiq, who is also a non-resident scholar at the Middle East Institute in Washington, considers this decision by the Saudis as a setback for Gwadar, the crown jewel of the China-Pakistan Economic Corridor, the $50bn Pakistan component of the Belt and Road.

The Saudi decision “is a setback for Pakistan’s plans for Gwadar to emerge as an energy and industrial hub. Pakistan has struggled to find a viable economic growth strategy for Gwadar,” he said. Any progress in Gwadar in the coming decade or two will be slow and incremental, he added.

Local politicians consider the shifting of the oil refinery a huge loss for economic development in Gwadar. Aslam Bhootani, the National Assembly of Pakistan member representing Gwadar, said the move is a loss not only for Gwadar but for all of the southwestern province of Balochistan. He said he would urge the Petroleum Ministry of Pakistan to ask the Saudis to reconsider their decision.

The decision has shattered the image of Gwadar as an up-and-coming major commercial hub. In February 2020, the Gwadar Smart Port City Masterplan was unveiled, forecasting that the city’s economy would surpass $30bn by 2050 and add 1.2m jobs. Local officials started calling Gwadar the future “Singapore of Pakistan”.

Rafiq said such dreams are unrealistic. “A more prudent strategy [for Pakistan] would be to use the city as a vehicle for sustained, equitable economic growth for Balochistan, especially its Makran coastal region,” he said.

Relocating the refinery from Gwadar to already developed Karachi also implies that CPEC, or BRI, has failed to promote Gwadar as a mega-investment hub. “Foreign direct investment in Gwadar will be limited and will remain exclusively Chinese,” an Islamabad-based development analyst said, “limiting the city’s scope for development”.

The refinery decision has once again exposed the infrastructural shortcomings of Gwadar, which Pakistan and China have failed to address in the past six years. Without highways and railways connecting it with northern Pakistan, the city will never develop as its proponents hope.

A version of this article was first published by Nikkei Asia on June 13, 2021. ©2021 Nikkei Inc. All rights reserved.

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Oil hits highest price since April 2019 before moderating

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The price of crude oil briefly hit its highest level for more than two years on Monday, lifting shares in energy companies, as traders banked on strong demand from the rebounding manufacturing and travel industries.

Brent crude crossed $75 a barrel for the first time since April 2019 before falling back slightly, while energy shares were the top performers on an otherwise lacklustre Stoxx Europe 600 index, gaining 0.7 per cent.

The international oil benchmark has risen around 50 per cent this year, underscoring strong demand ahead of next week’s meeting of the Opec+ group of oil-producing nations.

US manufacturing activity expanded at a record rate in May, according to a purchasing managers’ index produced by IHS Markit. Air travel in the EU has reached almost 50 per cent of pre-pandemic levels, ahead of the July 1 introduction of passes that will allow vaccinated or Covid-negative people to move freely.

“This is a higher consuming part of the year,” said Pictet multi-asset investment manager Shaniel Ramjee, referring to the summer travel season. “And the oil market is pricing in strong near-term demand that is better than previous expectations.”

In stock markets, the Stoxx Europe 600 dipped 0.3 per cent while futures markets signalled Wall Street’s S&P 500 share index would add 0.1 per cent at the New York opening bell.

The yield on the 10-year US Treasury was steady at 1.494 per cent. Germany’s equivalent Bund yield gained 0.02 percentage points to minus 0.154 per cent.

Equity and bond markets have consolidated after an erratic few sessions since US central bank officials last week put out forecasts indicating the first post-pandemic interest rate rise might come in 2023, a year earlier than previously thought.

US shares tumbled last week, while government bonds rallied, on fears of tighter monetary policy derailing the global economic recovery.

Wall Street equities then bounced back on Monday, with a follow-on rally in some Asian markets on Tuesday, as sentiment got a boost from more dovish commentary from Fed officials.

Fed chair Jay Powell, in prepared remarks ahead of congressional testimony later on Tuesday said the central bank “will do everything we can to support the economy for as long as it takes to complete the recovery”.

John Williams, president of the Federal Reserve Bank of New York, also said that the US economy was not ready yet for the central bank to start pulling back its hefty monetary support.

Jean Boivin, head of the BlackRock Investment Institute, said that “the Fed’s new outlook will not translate into significantly higher policy rates any time soon”.

“We may see bouts of market volatility . . . but we advocate staying invested and looking through any turbulence,” Boivin added.

The dollar index, which measures the greenback against trading partners’ currencies and has been boosted by expectations of US interest rates moving higher before other major central banks take action, was steady at around a two-month high.

The euro dipped 0.1 per cent against the dollar to purchase $1.1901, around its lowest level since early April. Sterling also lost 0.1 per cent to $1.3909.



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