Cyclical recovery to spur growth


Angela Ashton

The year 2020 delivered a black swan in the form of a global pandemic that plunged economies into recession and sparked market mayhem.

However, according to Evergreen Consultants, an independent investment consulting firm, the new year should deliver a strong economic rebound.

Angela Ashton, founder and director at Evergreen Consultants adds: “We expect a benign cyclical recovery from a low base of economic activity in 2020, 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.”

“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).

“Those economies with the greatest operating leverage will benefit the most. 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. 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,” says Ashton.

Current indicators suggest that the domestic economy will continue to gain momentum in 2021, she says.

“Tourism and education exports are still well down, but the global distribution of a vaccine should begin to see these areas improve in late 2021.

“A risk to the outlook is 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. 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.”

Ashton notes: “Globally if the deployment of vaccines is successful then Europe and North America should continue to build momentum in the first half of 2021. This 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. 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.

“Our overweight preference for growth assets extends across Developed Markets (DM) and Emerging Markets (EM). In the case of the latter, the global economic recovery should be beneficial due to EM’s relative high cyclical leverage, value bias and commodity exposure where China has been driving prices higher. But, the market upswing may be partially delayed as vaccine availability is likely to be tilted to more developed nations.

“Turning to more defensive asset classes, we expect cash rates to remain near zero.

“As has been the case in recent times, traditional fixed income markets are likely to appear relatively unattractive for some time to come, even if there is no surprise jump in inflation. Unless capital and labour becomes structurally unemployed, spare capacity and output gaps are likely to prevail into the foreseeable future.

“As such, our base case is for yields to rise only modestly, and with short-end rates anchored this should result in some curve steepening. If there were be another left tail event in 2021 then there is significant room for yields to rally lower and re-test historical levels,” says Ashton.

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