Recovery Will Be Unpredictable

A strategist from Invesco said that a recovery from the pandemic will be erratic but loose monetary policy around the world and vaccine optimism would keep risk assets supported.

David Chao told Reuters Global Markets Forum that , Asia-Pacific equities, specifically markets in Greater China and North Asia, are expected to rise on COVID-19 lockdown measures, a rebound in economic activity and increased capital outlay from the 5G uprise.  Chao said, “I am very much overweight equities over fixed income… 2021 could be a great year for emerging market (EM) stocks.” He also added that stock markets in the U.S. are expected to go through a period of improvement.  “From a fundamental standpoint, widespread inoculation will fuel a pickup in global demand, which should see cyclicals and value stocks rally relative to growth.”

From the view point of valuation, Chao said, the imbalance between value stocks, at 17 times price-to-earnings (P-E), and growth stocks, at 38 times P-E, was greater than the early-2000 record. “For a continued rally of value stocks, there needs to be economic growth, higher inflation, rising bond yields and improved corporate earnings, which will hinge on a vaccine being approved and available to the public,” he added.

He expects that the U.S. dollar to weaken in the first half of 2021 due to sufficient liquidity from the Federal Reserve’s ultra-loose monetary policies and additional fiscal stimulus measures. Chao said inflation could “finally start to rear its head” in the second half of 2021. “There will be a day of reckoning … and the first sign will be inflation and then credit defaults. However, that day isn’t on the horizon just yet,” he said.