The prospect of a more normal economy in the second half of 2021 has already triggered more normal bond yields now. While this sounds quite unspectacular, the rise in long-dated bond yields has been sizeable.
The rise in bond yields may pause for a while but is unlikely to reverse. Stocks thrive at a more measured pace. Structurally they are underowned anyway, particularly in Europe.
One year after the panic low: we keep taking profits on some high-flyers and are buying old-economy stocks instead.
For the 10-year US Treasury, this means yields have doubled since the start of the year. Moreover, they have hit our three-month target at 1.75%. Ironically, this sharp rise occurred almost exactly a year after the market’s panic low in March 2020 – for bond yields less than 0.5%. This shows how the ride has been over the past 12 months. Given statements by the US Federal Reserve last week, fundamental valuations, and some technical readings, we think the rate increase may be in for a breather. Yet we do not expect a reversal given the possible mini-boom in the economy at some stage in H2 2021. We have been highlighting that rising bond yields due to better economic prospects are more than welcome in the equity space. Only shock-like moves are unpopular, as they create uncertainty. Thus, a breather in the rise of yields may soothe some of the concerns of equity investors about ‘too far too fast’.
At the same time, the structural prospects are more than supportive for equities
Particularly so in Europe, where our technical analysts point to mind-boggling statistics about equity ownership. Well actually, one should speak about a lack of shareholder culture. Among savers in Switzerland and Germany, equities play an entirely secondary role. This provides more fuel for the structural bull markets in many European countries, as cash will chase stocks in the years ahead.
Conclusion for investors
In the shorter term, we continue to trim some of the high-flyers of the past 12 months. From a structural point of view, the shift to electric vehicles is unstoppable in the automotive space (see number of the week). Companies embracing the change will do best.
What is going on in the markets? Julius Baer’s experts share their views.