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The world economy – still recovering

Global fiscal and monetary stimuli are keeping the economic recovery on track. China is leading in terms of growth, followed by Europe and the United States. In this interview, Patrik Lang, Julius Baer’s Head of Equity Research, shares our macroeconomic views and outlines why he is buying equities in the current environment.

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The macroeconomic picture has improved significantly compared with Q2 – what is your view on the coming months?
Patrik Lang: “Indeed, the picture overall has improved but there is a twist; while leading indicators confirm a swift execution of the first part of the recovery, we believe that the second part, leading towards a full normalisation, could be more uneven and heterogeneous, as containment and policy measures diverge. The lack of governmental ability or willingness to provide continued fiscal support will result in a growth divergence between advanced economies and China on the one hand, and emerging market economies, in particular outside of Asia, on the other.”

In order to reach pre-crisis levels in terms of growth, fiscal support is crucial. Which countries have reacted most decisively?
“Many countries reacted swiftly to the impact of the exogenous shock on their economies and provided large stimulus measures. Unsurprisingly, those countries that can actually afford it, dug deeper into their pockets – and they stand to profit from that going forward.”

Inflation expectations in the US are back up at their February 2020 levels but US government bond yields remain near their all-time lows. What is your take on this?
“There are plenty of reasons to explain why US government bonds yield so little in the current environment including ongoing financial repression and the safe haven nature of these instruments, to name just two. However, looking at ‘fair value’, we would still expect yields to increase over the coming months. This is just one of the reasons why we continue to advise fixed income investors to consider moderate credit risk when seeking exposure to the asset class.”

Equity markets have performed well over the past months. Many investors are reluctant to increase exposure now, citing valuation levels and various risk factors. What do you tell them?
“When it comes to stock valuations we admit, that based on our earnings expectations for 2021, the S&P 500 is currently trading comfortably above historical averages, but the earnings recovery is on track, and we continue to expect further earnings upside revisions.

Further broad-based lockdowns remain unlikely, as targeted quarantine measures are more effective, hospital treatment has improved and mortality rates continue to come down as the virus is mutating. Against that backdrop, the economic recovery should continue, and the valuation gap between the digital lockdown winners and the rest of the market is likely to continue to narrow over the coming months.”

We see no evidence for a change in leadership in equity markets.

Patrik Lang, Head of Equity Research

Which sectors/segments do you consider attractive now and why?
“We see no evidence for a change in leadership in equity markets but expect the sector rotation into beaten-down cyclical stocks to continue as the economy continues to recover.

While we see comparably more upside for US stocks overall, we would also highlight the European small-cap segment, which has a high exposure towards cyclical sectors. Its recent outperformance has been moderate at best, compared with historical post-recession periods and relative valuation metrics, which are still well below historical averages.”