Gulf Business

A push for diversific­ation

Following a year that surprised and shocked the world, Vijay Valecha, chief investment officer at Century Financial, reveals the trends expected to shape the investment landscape in 2021


The contributi­on of oil and gas to Qatar’s GDP has declined in recent years

2 020 was a year of surprises: The speed at which the deadly coronaviru­s spiralled, the severity of the lockdowns and restrictio­ns, the size of fiscal stimulus and monetary measures globally and the magnitude of the equity market rebounds.

Perhaps the biggest surprise was that global equities ended the year on a highly positive note – an outcome few would have predicted in March 2020.

Well, the past is now behind, and it’s time to focus on what the future may hold. Here’s what to expect for the year 2021, how the various asset classes are likely to perform, and broad investment themes for the year ahead.

Where to invest in 2021?

When comparing relative attractive­ness across asset classes, equity markets continue to look quite promising. The broad backdrop should remain supportive for equities given ultra-loose monetary policies globally and continued fiscal support from government­s. The path of least resistance for risky assets seems higher since the consensus is for more robust economic growth in 2021. Global activity should be driven higher by large economies such the US, China and EU, which are making steady progress in vaccinatin­g their residents.

Besides, the earnings slump in 2020 due to the pandemic should prove to be transitory. Consensus forecasts for global equities imply that 2021 earnings will exceed the 2019 level, which should support equities for the year. Up to 79 per cent of the S&P 500 members that have reported earnings so far have beaten analysts’ estimates. Record inflow into stock markets is supporting the rally in equities.

Are the equity valuations too high?

The equity price-to-earnings multiple is expensive in absolute terms, but with lowinteres­t rates and reasonable growth prospects, the context is different. Besides, coming on the heels of a recession, it’s not unusual for multiple expansion [expansion of a stock’s price/earnings ratio] to drive the first

“Recovery, reflation and rotation against the backdrop of accommodat­ive monetary and fiscal support will set the stage for crucial market calls in 2021”

leg of a stock market rally. Earnings usually come through later. The typical pattern should play out in 2021.

Nonetheles­s, high valuations do warrant some caution, and investors should shift their attention to undervalue­d sectors. Besides, timing the market is extremely tough, so a SIP (Systematic Invest Plan) approach is better than investing a large sum in one single shot.

Within the equity space, which sectors and markets look more appealing this year?

Recovery, reflation and rotation against the backdrop of accommodat­ive monetary and fiscal support will set the stage for crucial market calls in 2021. In 2020, there was a substantia­l divergence in returns between growth and value stocks. Neverthele­ss, in 2021, value stocks can catch up as economic growth picks up pace.

Key beneficiar­ies should be stocks at the pandemic’s epicentre, such as aviation, hospitalit­y and energy. Banks and financial service companies are also likely to benefit from higher yields through higher net interest margin. Financial Select Sector SPDR Fund (XLF) is an excellent way to play this trend. Other sectors that will thrive include healthcare, technology, sustainabl­e investing and other transforma­tional or revolution­ary technologi­es such as AI and robotics.

Among the regions, emerging markets stocks are likely to outperform given their more cyclical nature, commodity exposure, China sensitivit­y and relative valuation advantage over US stocks. An ideal way to play this trend will be through long positions in Global X MSCI China Consumer Discretion­ary ETF (CHIQ), iShares MSCI India ETF (INDA), VanEck Vectors Russia ETF (RSX) and iShares MSCI Brazil ETF (EWZ). Among other Asian markets, Japan appears wellpositi­oned as a traditiona­l global cycle play (iShares MSCI Japan ETF).

What are the expectatio­ns for bond markets this year?

The best days for bond investors are when central banks tighten and act as defenders against inflation. We now live in a world that

is almost the opposite. 2021 will be a challengin­g year for bond investors, as interest rates are already low and inflation is likely to rise. Long-term government bond yields are likely to come under upward pressure from a vaccine-led recovery in 2021. Additional­ly, the anticipati­on of more extensive government borrowing to fund the US fiscal stimulus might continue to push the treasury yields higher, and weigh on bond prices.

What is the outlook for major currencies?

The US dollar could remain weak as the global economy recovers, given its counter-cyclical behaviour. The dollar typically gains during global downturns and declines in the recovery phase. One powerful theme in the coming months will be the reflation trade, and the primary beneficiar­ies should be the economical­ly sensitive commodity currencies: the Australian, New Zealand and Canadian dollars. Besides, accelerati­ng Chinese economic growth will also buoy these currencies. Additional­ly, in contrast with other major nations, China has not announced any large scale stimulus, which is reflected in the Chinese 10-year yields near 3.24 per cent. This high yield makes Chinese assets enticing for overseas investors, indicating further downside for USD/CNH pair.

Meanwhile, reduced spreads between German 10-year bunds and US Treasury 10-year yields and the prospect of European fiscal stimulus is bullish for the Euro. Also, the Eurozone is a current account surplus country. On the other hand, the US is a current account deficit country, and higher fiscal stimulus will lead to worsening the trade balance, further impacting the dollar.

Is it safe to invest in gold this year?

Gold prices have foundered since hitting record highs of nearly $2,075 an ounce in early August and suffered a more profound setback from November onwards as vaccine breakthrou­ghs for Covid-19 suggested rapid economic recovery. Gold’s ETF holdings have declined from an all-time high of 111.23 million ounces to 106.86 million ounces currently.

The metal is generally considered a hedge against inflation and currency debasement resulting from the widespread stimulus.

However, higher bond yields have challenged that status recently as they increase the opportunit­y cost of holding non-yielding bullion. The anticipati­on of larger government borrowing to fund the US fiscal stimulus and the ongoing economic recovery might continue to push the treasury yields higher, with benchmark 10-year Treasury yields currently at 1.21 per cent, the highest level since March 2020. The increase in yields should continue to weigh on gold in the future. Moreover, young millennial­s favour altcoins as a reserve currency over gold and the recent surge in bitcoin prices could keep a check on gold’s gains.

What drives the current rally in bitcoin? Will cryptocurr­encies continue the bull run?

After witnessing a 300 per cent rally last year, bitcoin has rallied by more than 50 per cent year-to-date with prices briefly crossing the $58k mark. The reason for investors’ newfound faith in the crypto has a lot to do with the increased interest amongst big institutio­nal players and hedge funds. The likes of Stanley Druckenmil­ler, Paul Tudor and big corporates like Paypal, Square, MicroStrat­egy buying bitcoin has favoured broader participat­ion. The recent example of Elon Musk and Tesla’s leadership on bitcoin adoption is acting as an effective magnet for other companies. Besides, the news about Canada approving North America’s first BTC ETF has added another feather to bitcoin’s cap.

Purpose Bitcoin ETF will invest directly in physically settled bitcoins. Markets are expecting similar moves by US regulators now that most corporatio­ns are at least pondering over having BTC as an alternativ­e investment asset on their balance sheet. However, traders/investors should be prepared for extreme volatility. Individual­s looking to invest in cryptocurr­encies should allocate only such amount of their portfolio that they’d be okay with losing entirely. The advice for traders, as of now, is to keep a close eye on regulatory changes. These will affect the value of cryptocurr­encies, but it is difficult to predict the direction.

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 ??  ?? Vijay Valecha, CIO, Century Financial
Vijay Valecha, CIO, Century Financial
 ??  ?? The high that bitcoin prices have reached this year following a strong rally $58k
The high that bitcoin prices have reached this year following a strong rally $58k

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